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MNI (Sydney)
SYDNEY (MNI)

The Reserve Bank of Australia is likely to consider raising interest rates for the first time in almost twelve years at its June 7 meeting, but market expectations of steep hikes this year should be weighed against the RBA’s cautious history and its concern not to slow the economy too quickly.

While rates futures are pricing in 205 basis points in rate increases this year, Australia is not facing the same extent of inflationary pressure as seen in the U.S. or Europe, and MNI understands that the RBA will be reluctant to inflict too much pain on a highly-indebted household sector, particularly at a time when wages are not keeping pace with the cost of living.

Raising rates in line with market expectations to 3% or more in 2023 from the current record low 0.1% would send mortgage rates to 6% from about 2% today, a move which the RBA fears could trigger significant defaults and a nasty correction in a housing market which saw prices soar by 17.5% in 2021.

Tightening as aggressive as that currently priced would also be out of character for a bank which took almost six years to hike by 350 basis points from 4.25% in 2002 to 7.25% in 2008.

NO HIKE BEFORE ELECTIONS

With a federal election due before May 21, the June meeting would be the first opportunity to act for the RBA, whose hike during an election campaign in 2007 attracted unwelcome scrutiny. This will allow it see data for labour costs, in national accounts to be released on June 1, inflation on Apr. 27 and the wage price index on May 18.

While inflation has risen faster and earlier than the RBA had expected, taking the last headline figure to 3.5%, core inflation is currently in the 2%-3% target range for the first time in seven years at 2.6%. The higher Australian dollar, which would normally be an irritant, is helping to cap imported price rises, while inflation in major trading partner China remains much lower than in developed economies.

Unemployment, at 4%, is not currently a cause for much concern at the RBA, which expects the rate to go lower in the next few months.

The RBA this week signalled that conditions for an interest rate rise were closer than it had thought at its March meeting, with the bank’s liaison programme showing fresh momentum for inflation and crucially also for wage increases. The change in outlook will flow through into forecasts in the next Statement on Monetary Policy on May 6, MNI understands.

MNI Sydney Bureau | +61-405-322-399 | lachlan.colquhoun.ext@marketnews.com
MNI Sydney Bureau | +61-405-322-399 | lachlan.colquhoun.ext@marketnews.com

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