RBA Faces Hawkish Heat as Strong Demand Lifts Inflation Risk

(Bloomberg) -- The Reserve Bank of Australia is under pressure to begin tightening monetary policy in as little as two months as a strengthening economy together with pre-election budget spending fuels inflation concerns.

A number of economists have either brought forward their call for the first interest-rate rise or are highlighting risks from Governor Philip Lowe turning hawkish following the March 29 budget and amid rising global prices, a Bloomberg survey showed. All expect the cash rate to stay at 0.1% at Tuesday's meeting, the first for newly appointed Deputy Governor Michele Bullock.

Read More: Australian Budget Pitches Cash to Key Voters Before Election

The RBA will be keen to stay out of the political spotlight given an election is due in May, even as the labor market approaches full employment and job vacancies hit a record, consumer spending is strong and commodity prices soar after Russia's invasion of Ukraine. Indeed, core inflation is already above the midpoint of central bank's 2-3% target for the first time since 2014.

An ANZ Banking Group Ltd. index of job advertisements released on Monday inched up further in March to be 57.5% above its pre-pandemic level.

“Labour demand is elevated and continuing to grow,” said Catherine Birch, a senior economist at ANZ. “Together these indicators point to further solid employment gains and upward pressure on wages growth.”

Normally, an economy running this hot would trigger a rate hike from the RBA, as it has in global counterparts in the U.K., U.S., Canada and New Zealand. But Lowe remains doubtful that higher inflation is sustainable without stronger wages growth. He wants to see salary increases of 3% or more, compared with the most recent reading of 2.3%.

At the same time, Russia's war on Ukraine has added psychology to the consumer-price equation, with households hit by soaring gasoline prices lifting inflation expectations. Lowe worries those perceptions will make higher inflation a reality, and he needs to guard against that. Government budget cash handouts and fuel tax cuts only add to the mix.

A separate gauge released on Monday showed inflation expectations accelerated in March to 4%, the highest reading since 2008.

What Bloomberg Economics Says...
“With price pressures remaining elevated due to the conflict in Ukraine, the RBA is likely to move sooner instead of later.”
-- James McIntyre, Economist.
Read the full report here.

Money markets expect the RBA to join the ranks of the Federal Reserve and the Bank of England by hiking in June. The cash rate is then seen climbing to 2.2% in a year's time and 3.3% in two years. The median estimate of economists has come forward to July -- due to some advancing their calls to June from August.

A rate rise in June would mean the election was out of the way and give Lowe a chance to review first-quarter inflation and wages readings on April 27 and May 18, respectively.

While Lowe's reference to inflation psychology last month signaled a softening of his stance, he remains among the most dovish central bankers in the developed world. The governor maintains that Australia, which doesn't have the intensity of inflation pressures of the U.S. and U.K., can afford to hold off hiking and test how low it can drive unemployment before wages accelerate.

“There's a huge benefit to the country of having people in jobs,” Lowe told journalists two weeks ago. “While we can, we'll keep interest rates very stimulatory to get people back into jobs. And how long we can do that for? I'm not sure, but that's a priority at the moment.”