Big bets on RBA’s June rate hike may not pay off, says former RBA economist
By James Glynn
SYDNEY — Australian financial markets are pricing in aggressive interest rate hikes from June, but a former senior economist at the Reserve Bank of Australia said government bond traders were on the verge of disappointment.
According to Peter Tulip, now chief economist at the Center for Independent Studies, the preconditions for an RBA interest rate hike, the first since 2010, are unlikely to be met in the near future.
“Hawks have been predicting an imminent acceleration in inflation for most of the past decade,” Tulip told Dow Jones Newswires. “They’ve been consistently wrong. We should be very skeptical of these forecasts and wait to see inflation accelerating in the data.”
Money market traders expect the RBA to lift its official exchange rate by 0.10% in June and continue to take it to over 2.0% by December. This trajectory implies that the RBA is expected to raise the benchmark rate by 50 basis points at two of its monthly policy meetings in the second half of the year.
While many banking economists admit financial market expectations seem too hawkish, it was money market traders who led forecasts that the central bank would start raising interest rates in June.
Anticipation of an interest rate hike in June formed quickly last week after the RBA withdrew from its front line that it was prepared to “remain patient”.
“I recognize that the inflation picture is uneven, with anecdotes going both ways,” Tulip said. “In particular, raw materials and overseas prices have risen rapidly.” Yet the main determinant of Australian inflation is the cost of labour, best measured by the quarterly wage price index, he added.
First quarter inflation data will be released at the end of April, followed by the first quarter WPI in May. The RBA is also likely to assess wage data that will form part of Australia’s first quarter national accounts data in early June.
The WPI recorded an annual growth of 2.3% until 2021, the same growth rate recorded in 2019, when the RBA missed its inflation target of 2% to 3%, said Mr. Tulip.
While it is true that the WPI could now start to rise at a faster rate because the economy is much closer to full employment than it was in 2019, Mr Tulip said the RBA would be wise to wait until there are clear signs of wage growth. in economic data.
The Australian dollar has also appreciated, which will help to suppress inflationary pressures, Tulip added.
The trade-weighted index is at 63.9, down from 59.3 at the end of January, implying that the RBA will pull back 0.8% from its lower average inflation forecast over the next few years, Mr. Tulip.
Still, if core inflation in the first quarter is elevated “then I agree there is room for tightening, especially if the increase cannot be attributed to pandemic bottlenecks,” Mr. Tulip.
Write to James Glynn at [email protected]