In light of the recent increase in oil prices and recent commentary from RBA Governor Phil Lowe, I have brought forward my expected first rate hike from February 2023 to September this year. A second rate increase is expected to follow in November.
In today’s speech, Governor Lowe openly suggested “it is plausible that the cash rate will be increased later this year.” Of course, plausible does not necessarily mean probable or likely – only that it’s now within the set of reasonable possible outcomes being considered by the RBA.
Indeed, Governor Lowe still appears keen to give the economy every chance of growing strongly and getting the unemployment rate low enough to generate a decent lift in wage growth. He is still loath to raise interest rates prematurely, lest this risk robbing Australia the chance of testing just how low the unemployment rate could go without sparking untoward wage and price inflation.
But he also acknowledges there is also a risk of waiting too long, especially if persistent high inflation caused by “overlapping supply shocks” feeds into inflation expectations.
In this regard, the war in Ukraine can be seen as a secondary supply shock – the first being the COVID related supply-chain bottlenecks – which adds to the risk that global food and energy prices will stay higher for longer.
By September, the RBA will have had the opportunity to review two more Wage Price Index (WPI) reports (the June quarter 2022 report is released on 17 August). If these reports show a further acceleration in wage growth from 2.3% to 2.75% (i.e., at least a discernible movement in wage growth toward 3%), that might be now sufficient for the RBA to begin the process of lifting rates to more normal levels. An acceleration of annual wage growth of this magnitude would require quarterly wage gains of at least 0.7% – or in line with that evident in the recently released December quarter report.
Of course, if wage growth accelerates much more quickly than this in the March quarter WPI report (due on 18 May), the RBA may well raise rates ahead of September – even possibly in June. That said, I suspect the RBA would like at least two reports of firmer wage growth to be more assured any upward surprise in the next WPI report was not just a “rogue number”.