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Economists predict change in RBA outlook

Economists are expecting the Reserve Bank of Australia to bring forward the timing of a likely increase in the cash rate following last week’s stronger than expected inflation figures.

The central bank holds its monthly board meeting on Tuesday.

For months RBA officials have been adamant that it will not raise the cash rate from its record low 0.1 per cent until inflation is sustainably within its two to three per cent inflation target, an event it had not expected to occur before 2024.

However, financial markets and economists have been betting for some time that it will need to move much earlier.

Such speculation was fuelled by last week’s annual rate of underlying inflation – which smooths out excessive price swings and is linked to interest rate decisions made by the RBA – unexpectedly jumping to 2.1 per cent.

It was the strongest result in six years.

Markets are now pricing in the risk of a 0.25 per cent rate hike in June next year and almost three more rate increases to follow over the remainder of the year.

While economists at St George believe this market move was “well overcooked”, the RBA will be feeling the heat from this backdrop.

“There is a possibility that the RBA waters down its guidance around the timing of the first rate hike, flagging the prospect of a move before 2024,” they said in a note to clients.

“Inflationary pressures combined with the prospect that the labour market may hit full employment sooner than previously expected suggests a shift in guidance cannot be ruled out.”

St George see the first move in the cash rate in early 2023.

BetaShares chief economist David Bassanese also feels that in the face of benign wage growth, it seems unlikely the RBA will raise rates in the next year.

RBA governor Philip Lowe has repeatedly said he wants to see wage growth of around three per cent compared with sub-two per cent now.

Economists are also predicting the RBA will end its targeting of the three-year bond yield and will further wind back its bond buying program early next year, which are both aimed at keeping market interest rates and borrowing costs low.

The RBA will release its quarterly statement on monetary policy on Friday.

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