From the Floor: what's next for the RBA

Published June 15 2021

ANZ Research’s updated economic forecasts for Australia reflect an improved growth environment, according to ANZ Economist Adelaide Timbrell. This poses questions for what the Reserve Bank of Australia will do next on interest rates.

ANZ Research has lifted its gross domestic product forecast for Australia to 5 per cent for calendar 2021. It has also lifted expectations for both unemployment (4.4 per cent by the end of 2022) and wages growth (3 per cent by the end of 2022).

The latter are two factors which will draw the eye of the RBA, Timbrell said.

“The stronger wages forecast does underpin our expectation the RBA will hit its inflation target band between 2 per cent and 3 per cent by late 2022,” she said. “We do expect wages growth to be above 3 per cent and inflation to be above 2 per cent within 2023, those are the two triggers for the RBA to move the cash rate higher.”

“Based on that, we think the cash rate will be 0.5 per cent by the end of 2023. We think that will happen in two steps in the second half of 2023.”

You can listen to the comments in the podcast below.

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Driving

Timbrell said tightening in the labour market would drive wages growth and be the major factor in getting inflation back into the RBA’s target band.

“That's going to happen even as the opening of the borders boosts the supply of labour,” she said. “The opening of the international borders is not necessarily going to have too much of a negative impact on wages.”

Timbrell said the RBA’s July meeting will include an announcement on the fate of both the central bank’s yield target and quantitative easing.

“We don't think the yield target will roll over” to the November 2024 bond, she said. “And without pre-empting the board's decision, we think flexible QE is the most likely approach.”

Full swing

Timbrell said strong inflationary pressures in the US, where the economy is “reopening in full swing”, would add to questions around the Federal Reserve’s monetary policy ‘tapering’ plan.  

“With employment yet to fully recover and the narrative of transitory inflation still in play, the Fed will be unlikely to shift its rhetoric much,” she said. “However, the transitory nature of inflation… does have some question marks on it.”

Services prices represent about 60 per cent of CPI in the US, Timbrell noted, and are running at a three-month annualised pace of 5.2 per cent, “suggesting inflation creep may be broadening”, she said.

“That's going to be a challenge for the Fed to see how long it can hold the line that inflation is transitory, especially if evidence continues to build that wage prices are rising.”

Timbrell also touched on the impact of elevated commodity prices in China. Listen to the podcast above to find out more.