Australia Rate Hike Later This Year ‘Plausible,’ Lowe Says
RBA’s Lowe Says Interest Rate Increase This Year Is ‘Plausible’
(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.
An interest-rate increase in Australia this year is “plausible,” Reserve Bank Governor Philip Lowe said, as policy makers try to gauge whether a surge in prices driven by Russia’s invasion of Ukraine will result in a sustainable return of inflation to target.
“We don’t have a plan that’s locked in,” Lowe said in response to a question Wednesday on whether the RBA will hike if inflation data released in April is very strong. “We are looking at, every month, the data that’s coming in.”
Earlier in his speech, Lowe told the Australian Financial Review Business Summit that in the current uncertain environment, where Australia’s wages growth and underlying inflation are weaker than elsewhere, the RBA can take the time to assess incoming information and review how uncertainties resolve. “Given the outlook, though, it is plausible that the cash rate will be increased later this year,” he said.
His remarks underscore a change in approach as the RBA turns more data-dependent, having stepped back from suggesting hikes were unlikely before late-2023. The tweak in the narrative also suggest Lowe could soon join counterparts -- from the Federal Reserve to the Bank of England -- who are either preparing to raise rates to counter inflation or have already done so.
But unlike global peers, Lowe isn’t closing off his options, underlining that the RBA does have scope to remain patient. He highlighted the dangers of raising rates too early, which could jeopardize pushing unemployment even lower.
“We’re still paying a lot of attention to what’s going on in the labor market. Sure, inflation is going to be high for a while as these supply side problems wash through,” he said. “After they wash through it’s really going to be important what labor costs are doing at the moment.”
The RBA last month ended its massive bond buying program, citing a stronger economic outlook, unemployment at a 13-year low of 4.2% and faster inflation. Financial markets are pricing in a 15-basis-point hike in June, while a majority of economists predict an August move.
“Lowe today sounded closer to raising interest rates than at any other time over the pandemic,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia, who expects a hike in June.
It “does not mean in and of itself that the RBA will raise the cash rate before August. But it does mean a rate hike is on the table before August.”
Two Issues
Restating his case for staying patient on policy, Lowe said there were two overarching issues the RBA was paying close attention to.
- The first is the persistence of supply-side price shocks and the extent to which developments in Ukraine add to these inflation pressures
- The second is how labor costs in Australia evolve
Underlining the uncertainties, a report released shortly after the governor’s speech showed consumer sentiment tumbled as war in Ukraine, flooding in the nation’s northeast, rising prices and the prospect of higher rates spooked households. The Westpac Banking Corp. survey showed pessimists outnumbered optimists for the first time since September 2020.
“The evidence is that most working Australians are still experiencing base wage increases of no more than 2-point-something percent,” Lowe said. “This is also consistent with what we are hearing through our business liaison program.”
©2022 Bloomberg L.P.