In Australia, Central Bank Reveals More Hawkish Stance
RBA keeps interest rates at record-low level, but cautions on inflation
SYDNEY—The Reserve Bank of Australia kept its official cash rate at emergency settings, but nudged open the door to an interest-rate increase in the months ahead with a more hawkish outlook.
The country’s central bank on Tuesday said it would keep its benchmark rate at 0.10%, as economists had expected, but dropped remarks that it was prepared to be patient from policy guidance as it acknowledged signs that wage growth could accelerate.
“Over coming months, important additional evidence will be available to the board on both inflation and the evolution of labor costs,” RBA Gov. Philip Lowe said in a statement. The board will assess that data to find a policy path that will support full employment in Australia and keep inflation in line with its target, he said.
Economists said the statement was more hawkish than expected. Omitting earlier references to patience signaled the timing of Australia’s first rate hike since 2010 had been brought forward considerably, said David Plank, head of Australian economics at ANZ Bank. While the RBA appears to be pointing to a June interest-rate increase, a rise in May can’t be ruled out, he said.
The RBA has been an outlier among central banks, frequently preaching restraint on a return to rising rates despite climbing inflation.
Federal Reserve officials last month voted to lift interest rates and penciled in six more increases by year’s end, the most aggressive pace in more than 15 years, in an escalating effort to slow inflation that is running at its highest levels in four decades.
But, unlike the U.S., where workers have been receiving much fatter paychecks, Australian pay raises remain below the 3.0% annual increase the country’s central bank has indicated as a key threshold for a pivot on rates.
Wage growth remained subdued at 2.3% in the fourth quarter of last year. Core inflation ran at under 3.0% in the same period.
In Australia, income growth has been moribund for a decade. Mr. Lowe has previously said rates shouldn’t rise until there is more evidence of increasing salaries, or it would risk pushing inflation back below the central bank’s target range.
The RBA wants to get inflation entrenched in a 2%-3% band again, after a yearslong lull.
Australia has a rigid wage-setting system, under which close to 40% of workers are part of industrywide pay agreements that could be years from being renegotiated. The enterprise-bargaining agreements have, meantime, locked in annual increases in many cases well below a pace that would satisfy RBA policy makers.
Once a heavily unionized country, today only a small proportion of Australian workers are represented by unions, skewing the power in wage negotiations toward employers.
On Tuesday, Mr. Lowe said wage growth on aggregate remains around the relatively low rates that prevailed before the pandemic. “There are, however, some areas where larger wage increases are occurring” and there is the prospect of further growth given the tightness of the labor market, he said.
Economists had been urging the RBA to begin signaling a rate increase on the horizon. Financial markets have for some time been pricing in the prospect of an interest-rate increase in June, followed by a rapid tightening cycle over the following year.
“The market has been widely expecting this pivot by the RBA for some time,” said Ivan Colhoun, global head of research at National Australia Bank. “Indeed, there are around 13 rate increases currently priced over the next two years.”
Many economists are expecting to see a sharp acceleration in consumer-price growth as recent floods have pushed up food prices, and soaring crude-oil prices have sharply raised gasoline prices at the pump.
Australia’s unemployment rate has headed toward its lowest point since the early 1970s, with job vacancies at record levels as a strong economic recovery tightens the labor market.
Still, the RBA’s decision to cut the reference to patience from its guidance led to a further jump in the Australian dollar, to a high of 76.26 U.S. cents from 75.40 cents before the statement. The gain extended a monthslong climb in the Australian currency that has been supported by rising commodity prices, most recently exacerbated by the conflict in Ukraine.
First-quarter inflation data, to be published later this month, and first-quarter wage-growth figures due in May will be critical for the central bank’s decision making and market pricing around the timing of a rate increase, said Robert Rennie, head of financial market strategy at Westpac. He said the Australian dollar could meantime climb further, toward 77 cents, given continuing support from elevated thermal-coal prices.
