June 27, 2022

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RBA Faces Hawkish Heat as Strong Economy Raises Inflation Risk

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(Bloomberg) — The Reserve Bank of Australia is under pressure to begin tightening monetary policy in as little as two months as a 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 to June 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.

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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.

Normally, that combination 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 beyond the election campaign, 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%.

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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…

Bloomberg News

2022-04-03 15:17:19

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