Cautious On Ukraine, Notes Upside Price Pressure For Energy

The RBA tipped its hat to the risks posed by the Russia-Ukraine conflict, deeming the event to be “a major new source of uncertainty,” while noting that the situation has forced commodity prices even higher.

• At home, the Bank pointed to the economic resilience of the Australian economy, flagging labour market developments as a key barometer on that front.
• The RBA reaffirmed its view that wage growth is expected to remain gradual, although there are uncertainties as to how employee compensation will move given the historically low levels of unemployment. Note that RBA Governor Lowe added references to broader measures of labour costs to the statement. While these references are new to the statement, they are not new to RBA speak. February saw Lowe reference the need to monitor a wider suite of compensatory measures given the varying nature of compensation in tight labour markets on several occasions.
• The Bank reaffirmed its central stance re: the inflation dynamic, with a further acceleration in price pressures expected this year, before a moderation is expected to come into play in ’23 (it still looks for underlying inflation of 2.75% during ’23, within the upper half of its 2-3% target band). The Bank has flagged a spike higher in petrol prices as a driving force for headline inflation moving forwards, no real surprise there.
• The overarching message of the Bank’s guidance passage was left unchanged, ultimately reaffirming its willingness to remain patient “as it monitors how the various factors affecting inflation in Australia evolve.” The energy market dynamics and reference to wider labour cost measures both got further airtime here. All in, the Bank sounds a little more worried when it comes to upside inflation risks stemming from the energy markets, but ultimately, interest rate hikes do not fix global supply chain and energy market issues. The phrasing deployed around the risk posed by the Russia-Ukraine conflict provided a slight dovish feel early in the statement, and more than offset any impulse from what could be perceived to be a slightly wider round of concern when it comes to inflation (albeit with the drivers outside of the Bank’s control).