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Fresh clues about when the Reserve Bank will start raising interest rates

Megan Neil

6 Apr 2022, 12:56pm

The Reserve Bank of Australia is now widely tipped to lift interest rates as soon as June – and a May hike during the federal election campaign hasn't been completely ruled out by some economists.

RBA governor Philip Lowe on Tuesday dropped his regular reference to the board being prepared to be "patient" before it raises rates for the first time since November 2010.

It was a subtle but important change in language that triggered a number of revised forecasts from economists, including those at Australia's top banks.

Mr Lowe said the RBA board has wanted to see actual evidence that inflation is sustainably within its 2% to 3% target range before increasing interest rates.

"Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target," he said in a statement after the board's monthly meeting on Tuesday.

"Over coming months, important additional evidence will be available to the board on both inflation and the evolution of labour costs.

"The board will assess this and other incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with the target."

Economists said the RBA's reference to important inflation and labour costs data was significant, given the first quarter consumer price index (CPI) will be released on April 27 and the wage price index on May 18.

Many economists now expect the RBA will begin raising interest rates in June, after it dropped its "patient" stance. Picture: Getty

Noting both pieces of data separately and using the wording "over coming months" indicated the RBA would like to see both before lifting the cash rate, Commonwealth Bank of Australia senior economist Belinda Allen said.

"This suggests that June, in line with our longstanding forecast, is the most likely timing for the first rate hike by the RBA since 2010," Ms Allen said.

Economists at three of the four major banks now expect a June rate hike, with ANZ and National Australia Bank both bringing forward their forecasts on Tuesday after the RBA dropped its "patient" reference.

Westpac chief economist Bill Evans said the RBA board, in a very significant change of heart, has given itself sufficient flexibility to make a move as early as June.

"There has been a major change in rhetoric and the board has now increased its flexibility to start raising rates as early as June, two months earlier than our current call which remains August," Mr Evans said.

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David Plank, ANZ head of Australian economics, noted that while the RBA will have inflation data in time for its May meeting, it won't have new information on labour costs until it meets in June.

Mr Plank said the use of the words "coming months" signalled that the RBA does not have a May rate hike as its central case, but said a move next month "can't be ruled out".

"A surge in core inflation in the first quarter CPI could leave the RBA thinking it has little choice but to move," he said.

"The timing of the May federal election is a complication. One option is for the RBA to make the case for a rate hike in its May statement, and then deliver it in June when the labour market data provides more information."

The May federal election is an added complication for the RBA in deciding the timing of rate rises. Picture: Getty

NAB's chief economists Ivan Colhoun and Alan Oster also believed the RBA's reference to important additional evidence over coming months made June the most likely meeting to start lifting rates.

"Though NAB's forecast for a very high March quarter CPI means that the May RBA board meeting is also live, especially if the unemployment rate prints below 4% in March as we expect," they added in a research note.

CBA's Ms Allen also noted there remains some risk of an earlier rate hike in May, saying an even stronger first quarter CPI print could force the RBA's hand.

"This is not our base case however, especially given the timing of the federal election."

AMP Capital chief economist Shane Oliver said the RBA is unlikely to raise rates at its May meeting during the election campaign, as it won't have wages data then.

"This may be a relief to the government but there will no doubt be lots of talk about rising rates through the election campaign, particularly as March quarter inflation data will likely be very high," he said.

Dr Oliver said the RBA is progressively clearing the way for a rate hike sometime in the months ahead.

"We continue to see the first rate hike in June, and now see the cash rate reaching 1% by year end. This is now becoming consensus," he said.

With many economists pointing to June as the likely timing for a RBA move, talk about looming rate rises will be part of the federal election campaign. Picture: Getty

Westpac's Mr Evans said with the RBA statement referance to "over coming months", it seems clear the board is not signalling a likely move at the May meeting in the aftermath of the March quarter CPI data.

"However, it could move to a tightening bias at the May meeting dependent on the inflation print of April 27 and conditions in the labour market in May," Mr Evans said.

"Even though the election in May posed some complications for monetary policy it appears from this change in rhetoric that the board is prepared to accept that a specific debate about an immediate rate hike following the election on May 14 or 21 can be contemplated, emphasising the independence of the Reserve Bank."

CommSec senior economist Ryan Felsman expects the RBA will wait until June before ending the longest RBA policy easing cycle on record.

"With the federal election due before May 21, the RBA board will be keen to stay out of the political limelight, and will likely keep interest rates unchanged at its May 3 policy meeting," he said.

Inflation and wages key to rate hike timing

The upcoming inflation and wages growth data are viewed as key to the timing of the first rate hike by the RBA board, which kept the cash rate at a record low 0.1% on Tuesday.

Mr Lowe said ongoing supply-side problems, Russia's invasion of Ukraine and strong demand as economies recover from the pandemic are contributing to the upward pressure on prices in many parts of the world.

Mr Lowe said while the Australian economy remains resilient, rising prices are putting pressure on household budgets and the recent floods are causing hardship for many communities.

He said higher prices for petrol and other commodities will lead to a further lift in inflation over coming quarters, with the RBA to publish an updated set of forecasts in May.

The RBA noted rising prices are putting pressure on household budgets. Picture: Getty

Mr Lowe said a further pick-up in aggregate wages growth and broader measures of labour costs "is in prospect" but it is expected to be only gradual.

PropTrack economist Paul Ryan said the decision to remove the reference to being patient signalled the RBA is closer to lifting rates, but the board wants more data to assess the persistence of inflation.

"The RBA is waiting to see evidence of sustained demand in the economy consistent with inflation being within its target over the medium run," he said.

"But the RBA cannot look through temporary inflation forever, so there remains the possibility strong supply shock-driven inflation will force the RBA's hand. The RBA will be keenly watching that inflation expectations across the economy are not being driven by increases in the cost of living."

Mr Ryan expected the RBA would wait for a board meeting that coincided with its quarterly Statement on Monetary Policy (SOMP) to increase rates, so it could explain its decision and economic forecasts.

While the next SOMP will be released in May, Mr Ryan viewed the August or November meetings as more likely for the RBA to start its hiking cycle.

"There's also the benefit of more data the longer they wait," he said. "August seems more and more likely given how strong inflation has been."

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