Australia | Apr 06 2022
Philip Lowe dropped a bombshell yesterday when he implied the RBA will no longer be “patient”, leading some, but not all economists, to tip the first rate hike in June.
-RBA loses "patience"
-June rate hike in the frame
-Not all economists agree
-Wage growth still the key
By Greg Peel
Last night one Fed member stepped up the monetary policy rhetoric in implying 50 basis point hikes will be needed from here on and the Fed’s balance sheet will need to be aggressively reduced, commencing in May, meaning selling bonds and mortgage-backed securities. This is known as quantitative tightening (QT), the opposite of quantitative easing (QE).
Up until yesterday the RBA, in acknowledging the evolving policy stance in the US and elsewhere, had maintained it was “prepared to be patient” with regard monetary policy tightening, implying no rate rise just yet. After all, the US CPI is running at 7.9% annualised (February) and wage growth at 5.6% (March).
In the December quarter, which is the latest Australian data update, the CPI was at 3.5% and wage growth at 2.3%.
Yesterday’s RBA statement reiterated the RBA’s policy stance over the past few months:
“The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases 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.”
While Australia’s headline inflation was last recorded at 3.5% — well above the RBA’s 2-3% target range – the board measures inflation as the “trimmed mean” or core rate, which excludes food and energy costs given their inherent volatility. That was 2.6% in the quarter, so within the target range.
One might argue food and energy prices are currently the main problem, and no doubt the RBA is not blind to this. But the board has consistently said inflation must be “sustainably” within the target range.
To achieve such sustainability will require wage growth to pick up alongside consumer price growth, which is why up to yesterday the RBA was prepared to be patient with regard the first rate hike. But not anymore.
While the RBA’s stance remains the same, as evidenced by the paragraph above, omitted from yesterday’s statement was the longstanding “prepared to be patient” line. Instead:
“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 its sets policy to support full employment in Australia and inflation outcomes consistent with the target.”
In other words, the RBA has lost patience, thanks to the war in Ukraine (which was only a week old at the March meeting) coming on top of prior covid-related inflation drivers, and will now be implicitly “data dependent”, as its US counterpart so often suggests.
Dependent on What?
Economists agree the two critical upcoming data releases are the March quarter CPI numbers, due on April 27, and the wage growth data contained in the March quarter GDP numbers, due on June 1.
On May 3, when the RBA next meets, only the CPI will be known. By June 7, when the RBA again meets, both will be known.
Economists agree it is unlikely the RBA will move in May as it will not yet have sufficient information, and there is the complicating factor of a federal election being held sometime before May 21, which the central bank is usually loathe to influence in any way (although it has happened before).
On that basis, many economists are now expecting the board to implement its first hike at the June meeting, dependent on the CPI data, and with headline inflation forecast to be around 4.6% it is also possible the board will signal a June hike at its May meeting.
There is no clue yet as to by what amount the RBA will hike. The obvious choice is an initial 15 basis points on top of the current 0.10% rate, to take the cash rate to a more familiar 0.25%, before standard 25 point hikes follow thereafter. But if the board is caught out by the strength of the upcoming numbers, vis a vis its own forecasts, it is not beyond the realms a 40 point hike will result, taking the cash rate straight to 0.50%.
But as they say, if you lined up every economist in the world you still wouldn’t reach a conclusion. Economist responses to yesterday’s statement vary in timing and quantum of the first hike and in expectations for hikes thereafter.
Take Your Pick
UBS was expecting such a shift in policy rhetoric, and now forecasts a June hike of 15 points, followed by traditional 25 point hikes in each of the post-CPI data meetings of August and November, to take the cash rate to 0.75%.
While the bond market to date has been pricing a far more aggressive tightening timeline from the RBA that “patience” otherwise suggested, UBS does not believe a current end-2023 cash rate expectation of 3.25% is realistic. Such a rate in that timeframe “would increase household interest payments so sharply that it would likely crash the housing market and cause a recession”.
ANZ Bank economists similarly find an end-2023 cash rate of 3.00%-plus over the top. In response to yesterday’s statement, ANZ has moved its first hike expectation to June from September, and assumes an initial 15 points.
ANZ then expects further 25 point hikes in July, August and November, to take the cash rate to 1.00% at end-2022, when previously the economists had forecast 0.75%. Thereafter, another 25 point hike at each quarterly RBA meeting in 2023 will take the end-2023 rate to 2.00%.
“At that point we think the RBA will pause for an extended period, not least because by then the Fed will have tightened materially and the US and global economies may be showing signs of slowing.”
ANZ does see the cash rate eventually rising to 3.00% or more, but not until some time after 2023.
Jarden is on the same page as ANZ Bank, moving forward its first hike assumption to June from September, and forecasting a 1.00% rate by end-2022, and 1.50% by mid-2023.
Westpac homes in on the line in yesterday’s statement noting “Over coming months, important additional evidence will be available to the Board…” and the “major change in [RBA] rhetoric” to suggest the board has now increased its flexibility to start hiking as early as June, rather than a prior expectation of August.
Citi, on the other hand, is sticking to its expectation of a first hike in August, believing it will take that long to satisfy the RBA’s wage growth requirement. The economists agree the June meeting will still be “live”, but note that the Fair Work Commission will deliver its annual minimum wage decision later in June, post meeting.
The last decision was an increase of 2.5%, and any more than that will also make July a “live” meeting if the RBA does not move in June, but Citi is sticking to August so far.
Morgan Stanley is also of the view the RBA will not see sufficient wage growth evidence in March quarter data, and notes that in his recent testimony to parliament, Governor Lowe said “just having one more CPI is not enough for that evidence to emerge" and that "another couple of CPIs would be good to see".
Morgan Stanley does not believe March quarter data will get the RBA over the line, and indeed questions whether June quarter data will be enough to justify “lift-off”.
Morgan Stanley is thus sticking to its August forecast.
The economists suggest the “bigger question”, beyond that of timing, is that of the size of the first hike. Other central banks, including the Fed, are expected to hike by 50 point increments. On that basis, a later hike than June but of 40 points instead of 15 is an option.
“More water and a bigger bridge ahead,” says Morgan Stanley.
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