Analysts see risks in RBA’s patient approach to inflation

‘There is still a good case to believe the bank won’t raise rates until early 2023,’ says David Bassanese of BetaShares. Picture: AAP

The Reserve Bank’s patient approach to the start of monetary policy normalisation – despite Australia’s faster-than-expected progress on jobs and inflation – may be a risky strategy, according to some economists who say the RBA’s patience will be tested by a further resurgence of inflation.

In a busy week of RBA communications in which the central bank continued to push back on market expectations of rapid-fire rate rises, the consistent message was that while inflation has picked up faster than anticipated it’s “too early to conclude that it is sustainably within the target band”.

But while some economists said the RBA could afford to be ­patient, most still predicted rate rises will start this year, with ­potentially negative implications for Australia’s the booming property market.

“Despite the upward revisions to the RBA’s inflation forecasts, there is still a good case to believe the bank won’t raise interest rates until early 2023,” BetaShares chief economist David Bassanese said.

His comments came as NAB predicted a 10 per cent fall in house prices next year after a 3 per cent rise this year, and a “turning point in prices” late this year with “expected rate hikes now coming sooner”.

Fixed home loan rates continued to rise, with NAB lifting its fixed rates by up to 0.2 per cent for owner-occupiers and investors on Friday. CBA lifted its rates on hikedThursday and Westpac went last month.

Mr Bassanese said current pricing pressure in product and ­labour markets at least partly reflected Covid-19-related disruptions, such as global supply chain bottlenecks and the reduction in skilled immigration – both of which may well dissipate over the coming year.

“Wage inflation is still too low to be consistent with the RBA’s 2-3 per cent inflation objective over the medium term,” he said. The RBA has said that sustainable inflation requires higher wage growth of at least about 3-3.5 per cent, whereas the September quarter rise was 2.2 per cent.

“To my mind, the required rate of wage acceleration to justify a 2022 rate hike still seems unlikely,” Mr Bassanese said. “It would take a large quarterly wage gain of at least 1.2 per cent to have annual wage growth reach 3 per cent in the December quarter report due this month.”

And it would take average gains of 0.75 per cent for the next three reports to achieve annual wage growth of 3 per cent by the September quarter report, which is not due for release until November.

“While this is possible, as the RBA notes ‘slow growth in public sector wages and the inertia resulting from multi-year enterprise agreements’ is likely to result in a more gradual lift in wage inflation,” Mr Bassanese added.

But the RBA only expects annual wage growth of 2.5 per cent when the June quarter report is released in mid-August, and expects just 2.75 per cent annual wage growth when the December quarter report is release in February next year.

“Last but not least, the RBA would be well aware that how the economy handles higher interest rates is increasingly uncertain – given high debt levels – so it will want to be doubly sure that it has met its inflation mandate before considering the first rate rise in over a decade,” Mr Bassanese said.

But ANZ’s head of Australian economics, David Plank, said the RBA was “too pessimistic” on wages since it did not expect growth in the Wage Price Index to reach 3 per cent until mid-2023, although it did see average wages growth reaching 4 per cent by mid-2023.

“We think that clear evidence that average wages growth is on its way to 4 per cent will be enough to get the RBA to tighten, consistent with [governor Philip] Dr Lowe’s comment earlier this week that the bank looks at more than just the WPI when analysing wage trends,” Mr Plank said.

He predicted the RBA would start tightening in September, which was “later than the market is pricing as it will take time for evidence of this to accumulate and the RBA intends to be ‘patient’.”

He saw the cash rate target at 0.75 per cent by the end of 2022 and 2 per cent by the end of 2023.

While the RBA significantly upgraded its forecasts for underlying inflation, it still looks “too conservative”, according to CBA’s head of Australian economics, Gareth Aird.

On wages, he noted that the RBA had made only very modest upward revisions to its forecasts despite the significant downward revision to the unemployment rate. The RBA’s underlying inflation forecast suggested it was treating the December quarter jump as an “anomaly”, yet data suggested “the inflationary pulse has continued to lift over the early part of 2022”.

“For comparison, we expect underlying inflation to be 3.7 per cent year on year at mid-2022,” Mr Aird said. “Overall we believe there is considerable scope for inflation and wages data in the second half of 2022 to be stronger than the RBA has forecasts … which may test their resolve for inflation above the target band.

“This leaves us comfortable with our call that the RBA commences hiking in August.”

RBC chief economist Su-Lin Ong noted that while Dr Lowe this week didn’t rule out lift-off in 2022, the RBA’s base case of 2023 “looks at odds” with the market and economists’ pricing of the cash rate that the central bank assumed in its Statement on Monetary Policy forecasts.

It “risks falling behind the curve” amid a hawkish shift elsewhere and its minor upward revisions to the WPI “contradict somewhat the marked revisions elsewhere,” Ms Ong said.

“Coupled with the distinctly hawkish shift from the ECB and BoE last night following the Fed and BoC last week, the RBA looks increasingly like an outlier as the global central banking stance shifts away from ultra-accommodative settings designed for very different circumstances.” she added.

“We have sympathy for some patience from the RBA as it awaits further signs of labour market strength but their implicit base case of 2023 looks a little complacent.”