The Reserve Bank of Australia has been quite clear that interest rates in Australia will not budge until unemployment, wages and inflation are all exactly where it wants them to be.
This, RBA governor Philip Lowe said, was expected to happen in 2023.
However, central banks around the world have been feeling the pressure of rising inflation, which has also seen a boost in Australia.
“I think they'll be forced to move earlier than they have suggested,” AMP Capital chief economist Shane Oliver told Yahoo Finance.
“We expect rate hikes coming in November of next year. So, they’re a way off but the bank will ultimately be driven by data and forecasts.”
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It’s not that the RBA is being stubborn, just that it can only act based on what it currently sees, as opposed to a best- or worst-case scenario.
Oliver said that while the bank's current view was that unemployment, wages and inflation wouldn’t be in its target range until 2023, that didn’t mean it couldn’t change.
“If we continue to see stronger economic data in the job market, wage growth and inflation, then I think they'll bring forth the timing of the cut,” he said.
“And I think next year, we'll probably see stronger economic data, ultimately supporting a move on rates around November.”
What are the RBA’s targets?
In his December rates decision, Lowe noted that inflation in Australia was rising but he didn’t believe the change was significant enough.
“Inflation has increased but, in underlying terms, is still low, at 2.1 per cent,” Lowe said.
“The headline CPI inflation rate is 3 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions in global supply chains.
“A further, but only gradual, pick-up in underlying inflation is expected. The central forecast is for underlying inflation to reach 2.5 per cent over 2023.”
Job ads are rising rapidly and there are a number of industries that have reported worker shortages.
These factors combine to push wages higher as employers try to attract staff.
“A further pick-up in wages growth is expected as the labour market tightens,” Lowe said.
“This pick-up is expected to be only gradual, although there is uncertainty about the behaviour of wages as the unemployment rate declines to historically low levels.”
Lowe wanted to see the unemployment rate hit around 4 per cent. It is currently at 4.6 per cent.
“The central forecast is for the unemployment rate to trend lower over the next couple of years, reaching 4.25 per cent at the end of 2022 and 4 per cent at the end of 2023,” Lowe said in his November rates decision.