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Can a rate lift begin earlier than expected?

Team Veye | 12 Jul 2021

Can a rate lift begin earlier than expected?

The Reserve Bank Board is responsible for formulating monetary policy. The Reserve Bank of Australia (RBA) reports its decision on where to set the benchmark interest rate. The Reserve Bank held the cash rate target at a record low of 0.1 per cent.

Since short term interest rates are an important determinant of currency valuation, investors watch interest rate changes closely. A reading that is stronger than a forecast is generally supportive (bullish) for the AUD, while a weaker forecast reading is generally negative (bearish) for the AUD.

RBA has repeatedly insisted that it won't lift the cash rate until the labour market is sufficiently tight to have started to generate wages growth of 3% or more and inflation sustainably in the 2-3% target zone. The continued closure of Australia's international borders is resulting in faster reductions in the unemployment rate. According to the Reserve Bank governor, Dr Lowe, the surprisingly strong economic growth rebound and large fall in unemployment had not translated to bigger pay increases.

Even before the pandemic, Wage growth in Australia had slowed down by more than it had in most other countries even though the real economy in Australia has been much better than in almost any other Western country

The labour market has started to outperform expectations and has weathered the withdrawal of JobKeeper well. But despite a strong result in the ABS’ latest labour force survey, the recovery has been erratic due to current lockdown and other related factors.

While the recovery has been stronger than expected there is still time to reach the RBA’s conditions for a rate hike. It is expected that economic recovery gathers a faster pace and RBA may need to moderate inflationary pressures.

The Reserve Bank governor has not ruled out an interest rate rise before 2024, So a 2023 rate hike, ahead of the RBA’s own expectations could be quite possible.

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