Distributive policy

Australia’s strong economic recovery stokes monetary policy hawks

Even though the Reserve Bank of Australia has remained evasive about the start of the rate hike cycle in 2022, strong economic growth indicators have led some economists to predict that interest rates could start to rise as early as June.

Labor force data released last week by the Australian Bureau of Statistics (ABS) showed the unemployment rate remained unchanged at 4.2%, although January was affected by the Omicron variant of Covid-19. Employment, in fact, increased by 13,000 people.

Meanwhile, a new ABS indicator released on February 22 showed that monthly household spending is also on the rise in Australia. In December 2021, Australian households spent 8.6% more than in the same month last year.

Price hike possible in June

“Household consumption contributes around 50% of Australia’s gross domestic product; is therefore a key element of the economy. The new data will allow governments, researchers and businesses to identify changes in spending behavior by spending category and by state and territory,” said Jacqui Vitas, Head of the Macroeconomic Statistics Division at ABS, noting the importance of new data.

According to Ben Udy, an economist at Capital Economics, the unemployment rate should soon start to fall and inflation and wage growth would rise faster than the RBA expects.

“The further rise in Australian employment despite the Omicron outbreak in January highlights the resilience of the Australian labor market and supports our forecast that the RBA will hike rates in June,” Udy said.

Despite strong economic indicators stoking monetary policy hawks in markets and among commentators, RBA Governor Philip Lowe continues to remain hesitant about a downright hawkish turn.

RBA remains patient

As recently as Feb. 11, Lowe told Australian lawmakers it was “too early to conclude” that inflation is sustainably within the RBA’s target range.

“In underlying terms, inflation has just hit the midpoint of the target range for the first time in more than seven years. distribution, which should only be temporary. This also comes at a time when overall wage growth is not higher than before the pandemic, which was associated with persistently below-target inflation,” said Lowe.

He also added that the RBA is prepared to remain patient: “We have the ability to wait and see how the data evolves and how some of the uncertainties are resolved.”

Inflation and wage growth still slow

Catherine Birch, senior economist at ANZ Research, is a little more conservative on the forecast for when the RBA will raise rates. According to Birch, Australia’s gross domestic product and labor market recovery have outpaced most of the rest of the world, although inflation and wage growth have not.

“We expect the RBA to begin raising the cash rate in Q3 2022, reaching 0.75% by the end of 2022 and 2% by the end of 2023, with more gradual increases to follow. our opinion, it is likely that the maximum cash rate for this cycle will be a handful of 3,” she said.

According to Francesco Pesole, forex strategist at ING, Wage Price Index data for the first quarter of 2022, due out on May 18, would be crucial to see if the RBA sticks to its patient stance. He added that a modest increase would help the RBA’s view.

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