The Reserve Bank of Australia has recently dismissed a chance of rate hike any time soon after a period of financial turmoil. This has found relation to emerging fears of inflation and the mountain of household debt. The recent market volatility is not expected to have any significant impact on the growth outlook for Australia and the rates in Australia do not need to “move in lock-step” while the United States might have a different stance on interest rate hikes.
RBA has highlighted in the past that there is a need to return to a federal surplus to build a buffer to deal with a future economic shock. It is expected that a lift in wage growth is likely to be necessary for inflation to average around the midpoint of the 2-3 per cent medium-term inflation target, in order to have a stronger sense of shared prosperity. Many investors had been working under the false assumption that unusually low inflation and unusually low volatility in asset prices would persist even with above-trend growth at a time of low unemployment. Further, annual wage growth needs to be accelerating to around 3.5 per cent from the current 2 per cent in order to improve the scenario. Meanwhile, the recent upturn in the economy has boosted the domestic outlook with better employment gains and retail sales.
In view of the interplay among the above factors, RBA has left the cash rate on hold at 1.5 per cent during its recent meeting. As the jobless rate was at 5.4 per cent which is around 0.5 percentage that is a point above the RBA full employment rate, so most economists and financial markets don’t expect a rate hike before the middle of the year. According to the financial market pricing, there is a chance that the rates might hike in May by about 4 per cent. However, this can only find support from improving employment rates, wages growth and inflation scenario. On the other hand, some believe that the interest rates may only pick up next year.
While GDP growth is forecasted to average a bit above 3 percent over the next couple of years, the central bank would need to be cautious in terms of interest rate hiking given the above backdrop while threat from rising Australian dollar also infuses weakness in economic outlook.
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