Goldman: Price/Wage Dichotomy Present 2-Sided Risk Around RBA Path

Goldman Sachs note that “price/wage dichotomy present two-sided risks around RBA path. The RBA will meet this week following the Q421 CPI report, which showed strong price pressures even before the widespread Omicron-related disruptions set in. We therefore expect the RBA to pursue a more hawkish policy trajectory by halting its ongoing QE program and revising its guidance to show an earlier liftoff (in 2023). We will be especially focused on how the RBA weighs recent inflation strength versus more subdued wage growth so far. The emphasis on the latter could still see the Board favour patience on tightening policy. Still, uncertainty around wages in our view keep risks tilted towards even earlier rate hikes than our economists' new baseline for liftoff in November, particularly if wage growth rises more than our baseline. However, our economists still view the 100bp of tightening currently priced as likely overly aggressive despite the elevated inflation print. While we believe the RBA is unlikely to deliver on the four hikes markets have priced this year, we would avoid receiving the AUD front-end until we receive more clarity on either the extent of the shift in the RBA's reaction function or developments on the wage growth trajectory.”