The RBA have been keeping to a very dovish script despite the fact that short term interest rate markets are pricing in six 10bps rate hikes this year. See here for the last breakdown of March’s RBA meeting. You can read the full text here. The dovishness of the RBA is being looked through by the market as the pricing for interest rate hikes show. GDP is at 4.2% in Australia, jobs data is strong with unemployment at 4.0%, and headline inflation is above the RBA’s median target at 3.5%.
In the last RBA meeting we identified three areas that the RBA need to see progress in. These areas remain key.
1. Wages a focus for the RBA
See here for an explanation as to why wages are important for the RBA. The bank want to see wages growing at a rate of 3% y/y in order to have confidence to hike rates. This remains the most important part of the jigsaw. When we get wage price data, which does not come in now until May 18, this will be a crucial focus. Hot wages, at or near 3% will move the RBA’s hand as they have already told us that is what they are looking for.
2. Inflation a focus for the RBA
The next inflation print comes in on April 27 and the bank want to see inflation ‘sustainably’ above their target. Now, what they mean by that is they want to see inflation is places other than the supply chain. Headline inflation is already above their target and they expect it to only drop to 2.7% next year. So, you could argue that the RBA’s target for inflation has been reached. However, the bank will say ‘ we want inflation to be not just in the supply chain’. It seems that this is what they mean be sustainable.
3. Russia/Ukraine risk a focus for the RBA
The RBA stressed these risks in the last meeting and the conflict still continues, so that will inject some uncertainty bar a cease to the conflict before the RBA meeting.
The outlook for Australia’s recovery looks good especially with commodity prices surging. Australia exports large amounts of Iron Ore and Coal and these prices are buoyant. The easier monetary policy for China should also underpin an Australian recovery, so the bank should be in a reasonably confident position. However, it is unlikely that they will recognise this as reasons to shift on interest rates. Remember the RBA have kept taking a dovish stance when the data may indicate reasons for more optimism. One thing we must bear in mind is the housing market. A red hot housing market, with elevated prices on low interest rate deals, is a recipe for disaster if rates have to rise quickly. It may be the consumer that the RBA is trying to protect by keeping a dovish stance. One of the key skills in trading is being able to recognise when a shift in central bank policy happens. This way you can be the first to react.