RBA Will Likely Hold Rates With Geopolitical Risks Growing

(Bloomberg) -- The Reserve Bank of Australia will probably highlight the domestic economy's underlying strength and escalating geopolitical risks when it announces Tuesday that interest rates will stay unchanged at a record low.

Governor Philip Lowe will keep the cash rate at 0.1%, economists polled by Bloomberg predicted, even as employment and demand are strong. Lowe's dovish stance is based on tepid wages growth and will be reinforced by Russia's invasion of Ukraine, which propelled oil above $100 a barrel and prompted investors to reassess the pace of global tightening.

“Our conviction in a June rate hike has fallen somewhat,” said Andrew Ticehurst, senior economist and rates strategist at Nomura Australia Ltd. “We think the RBA could elect to focus more on the negative hit to global growth and global sentiment associated with the Russia/Ukraine situation, rather than on any boost to inflation coming from higher oil and commodity prices.”

The RBA is testing how far it can drive down unemployment before setting off demands for higher pay. Lowe maintains that only stronger wages growth can underpin the sustainable return of inflation to the RBA's 2-3% target, and he's unwilling to tighten policy until he's confident that's been achieved.

That view has been challenged by economists ranging from ex-RBA board member Warwick McKibbin to JBWere Ltd. Chief Investment Officer Sally Auld, who warn a failure to hike early is likely to leave Australia behind the curve.

RBA Risks Being Rushed Into Short, Sharp Tightening Cycle: Auld

Money markets concur, pricing in rate liftoff in June, along with economists like Ticehurst and Commonwealth Bank of Australia's Gareth Aird, though a majority still expect a first rate hike in August.

The RBA is forecasting the economy will expand 4.25% in 2022 and unemployment will fall to 3.75% later in the year, a level unseen since the early 1970s. Fourth-quarter gross domestic product data Wednesday are expected to confirm the economy is on a strong path to recovery.

Aird, head of Australia economics at CBA, reckons Lowe will make reference to the conflict in Ukraine on Tuesday, but doesn't believe the issues arising from it would prompt the RBA to reassess its outlook for the economy.

“The underlying inflation rate in Australia is going to be so strong in the first quarter and the labor market is going to be so tight and the unemployment rate so low that by the June board meeting, the RBA should be able to conclude that we're at full employment,” he said.

Another source of support and uncertainty for the economy is the reopening of the nation's borders, ending a two-year travel ban. That will allow international tourists and students to return, but also provide additional workers, potentially easing pockets of labor shortages.

Still, the unfolding crisis in eastern Europe adds to policy uncertainty that could result in the RBA standing pat for a while longer, according to Ticehurst. Nomura now expects the Federal Reserve will move in 25-basis point steps, rather than initiating liftoff with a 50 basis points hike in March.

“This could also give the RBA a bit more freedom to hold off,” he said.