Australia’s central bank opens door to 2022 rate hike, pleads for patience

SYDNEY, Feb 2 (Reuters) – Australia’s biggest central banker opened the door on Wednesday for the first time to a possible interest rate hike later this year, but argued there was a rare opportunity to achieve full employment which justified being patient.

Offering an optimistic economic outlook, Reserve Bank of Australia (RBA) Governor Philip Lowe has repeatedly pointed out that the country is on course to reduce unemployment to below 4% for the first time in half a year. century and pushing up wages after years of subpar growth.

“We have a unique opportunity here to put people to work and grow their incomes faster, and we can do that without running an unacceptable risk of inflation,” Lowe said.

“The (RBA) Board of Directors has rendered judgment which is an appropriate compromise.”

The RBA expects unemployment to fall to 3.75% later this year, from 4.2% currently, and stay there next year. Wage growth is expected to reach 2.75% this year and reach 3% in 2023, a level that policymakers have long desired.

“If things are going well and the economy is doing well…then there are clearly scenarios where we would raise rates later this year,” he added.

It was a change of position given that Lowe had long insisted that the 0.1% cash rate was unlikely to rise until 2023 at the earliest.

Lowe also noted that it was plausible that a rate hike was a year or more away, and that the bank would carefully monitor inflation, wage and consumer data over the coming year.

Financial markets are betting a move will have to come much sooner given that core inflation jumped to 2.6% last quarter, a level the RBA did not expect to see until the end of the month. next year.

Still, Lowe said it was too early to conclude that inflation would stay within the bank’s 2-3% target range and much depended on whether or not global supply bottlenecks persisted. .

Investors responded to his dovish view by reducing bets on a short-term rate hike, with a move to 0.25% in May now seen as a 50-50 chance instead of a done deal.

The futures market still suggests that rates could reach 1.25% by the end of the year, the same price as US rates. Lowe said he “struggled” to understand such aggressive bets given that Australian inflation was half that of the United States.

Economists at Australia’s major banks all expect rates to rise in the second half of the year, with Westpac and CBA tipping in August; ANZ for September and NAB for November. None see rates close to 1.25% by the end of the year.

“Throughout the pandemic, the RBA has seemed as dovish as possible on the inflation outlook and cash rate outlook at every opportunity,” said Gareth Aird, head of Australian economics at the CBA. “Today was no different.”

“Nevertheless, we expect inflation, wages and labor market data to be strong enough over the next few quarters for the RBA to raise the benchmark rate in August.”

Reporting by Wayne Cole; Editing by Kim Coghill

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