RBA’s Lowe Pushes Back Against Bets on Early Rate Rises

(Bloomberg) -- Australia central bank chief Philip Lowe pushed back against investor bets on early interest-rate increases, arguing it will take time to drive faster wages growth and reiterating he doesn’t expect liftoff before 2024. 

“I find it difficult to understand why rate rises are being priced in next year or early 2023,” Lowe said in a speech to the Anika Foundation on Tuesday. “While policy rates might be increased in other countries over this time frame, our wage and inflation experience is quite different.”

Australian overnight-indexed swaps show some parts of the market still doubt the Reserve Bank’s guidance:

• OIS two-year, one-day forwards are sitting above 0.5%, signaling bets the RBA will raise its rate at least twice;
• Meanwhile, standard two-year OIS swaps are under 0.2%
• Similar gaps between the swap rates opened in 2013 and 2016-17 when traders started speculating that the RBA’s next move would be a hike

While South Korea raised rates and New Zealand is set to follow, both central banks are also trying to temper surging asset prices. The RBA has made clear that it won’t be using monetary policy to cool the housing market, with regulators likely to use macro-prudential rules instead.

Lowe is trying to use a record-low 0.1% cash rate to tighten the labor market and spur faster wages growth, a goal interrupted by an outbreak of the delta variant of coronavirus that’s forced half of Australia’s population into lockdown.

Even before delta, Australia’s strongest industries showed only modest labor demand. The governor says it will take “some time” for pay gains to reach a level that will drive faster inflation.

On the impact of lockdowns on the labor market, Lowe reiterated that hours worked were likely to take the bulk of the hit. He added, however, that with unemployment “it would not be surprising to see readings in the high fives for a short period of time.” 

The jobless rate was 4.6% in July and economists predict it rose to 5% in August because of stay-at-home orders.

Taper Timing

Australian policy makers last week pushed ahead with a tapering of weekly bond purchases to A$4 billion ($3 billion) from A$5 billion, while extending the duration by three months to mid-February.

“Given that the recovery has been delayed, we considered it appropriate that we delay,” Lowe said. “By February we will know more about how the economy is responding to the easing of restrictions.”

Asked about policy sequencing, Lowe said the bank will conclude its bond purchases once inflation and employment are on track to reach their targets. Once inflation has sustainably returned to around the midpoint of the 2-3% range the RBA will begin raising rates.

The highly contagious delta variant has prompted New South Wales and Victoria to abandon Covid-zero policies and instead seek to hit vaccination targets and try to live with Covid.

Lowe said a “source of uncertainty” is how Australians will respond to the eventual easing of restrictions, given that the loosening is likely to take place with the virus still circulating in the community. 

“This is quite different from our earlier experience, when the number of cases was close to zero, and there was a very quick bounce-back,” he said.

The RBA is expecting the economy to recover in the final three months of the year from a contraction this quarter of 2% or “possibly significantly larger.”

©2021 Bloomberg L.P.