RBA: Inflation Pressure Remains
RBA: Inflation Pressure Remains
Although the RBA both hiked rates to the highest level since 2012 and at the sharpest rate since 1989, the decision was as expected. Short Term Interest Rate Markets were expecting a 25 bps hike and the RBA hiked by 25 bps. The main standouts from the meeting were the RBA’s mention of a wage-price spiral, monetary policy lag, high inflation, and the need to keep hiking interest rates.
The RBA once again repeated that inflation was too high. The headline level is at 7.3% y/y and the core is at 6.1% y/y with both measures showing a steady uptrend with no obvious signs of peaking.
The RBA committed to re-establishing the 2-3% inflation target, so this indicates there are most likely more rate hikes to come.
Monetary policy lag
The RBA referred to a monetary policy lag and expected to hear more of this from central banks. There is a natural delay from an interest hike working its way through the economy. So, as more and more mortgages are renewed that will slowly cool demand as households have less disposable income. This is why the RBA said, ‘Household spending is expected to slow over the period ahead although the timing and extent of this slowdown are uncertain’.
Wage price spiral
The RBA is concerned about the possibility of a wage-price spiral. Remember the strong NFP last Friday? That is likely to be a theme for central banks’ concerns. Once inflation is in wages it gets ‘hard baked’ into the economy. Central banks fear it and wages are growing in Australia. The RBA won’t like it if that continues and will mean they will need to keep hiking rates.
These are the main reasons the RBA says that: ’It is closely monitoring the global economy, household spending, and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.’
What does this mean for the AUD right now? Not much. This is because much of what the RBA is doing has been expected. But it does mean incoming inflation and wage data will be crucial for the path of interest rates. A good pair for trading any significant shifts is generally the AUDNZD as a way of trading central bank divergences from the RBA and the RBNZ.
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