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Reserve Bank Backtracks on Rate Rise Guidelines

The RBA has dramatically changed its recent guidelines for a rise in official interest rates, indicating that higher rates will now likely come sooner rather than later.

The RBA has consistently stated that a rate rise was dependent on inflation being “sustainably within the 2 to 3 per cent target range”.

The minutes of the recent RBA April meeting revealed that:

“inflation has picked up and a further increase was expected, with measures of underlying inflation in the March quarter expected to be above 3 per cent.”

Although inflation has increased sharply over the past year - due primarily to Covid-related supply constraints driving higher fuel and housebuilding costs – the other key ingredient for higher rates - wages growth - has remained benign.

The Bank has previously stated that: 

Wages growth remains modest and it is likely to be some time yet before growth in labour costs is at a rate consistent with inflation being sustainably at target.

The latest minutes confirm this: 

Wages growth had also picked up but, in aggregate terms, had been below rates likely to be consistent with inflation being sustainably at the target.

The Bank last raised rates in November 2010 following a surge in annual wages growth over the previous year at or above 3.0% and peaking over the December quarter of 2010 at 3.9%.

The latest ABS Wage Index data reports that annual wages growth over the December quarter remained at the low levels of recent years at just 2.3%.

Wages

The March quarter ABS Wage Index data - due to be released on May 18th - is unlikely to record a significant rise in annual growth given the nature of the Australian labour market – and certainly not above the 3.0% notional RBA target range.

Despite the uncertain outlook on currently benign wages growth, the RBA in its latest meeting has changed its stance on rate rises stating that:

These developments have brought forward the likely timing of the first increase in interest rates.

Higher inflation and low wages growth resulted in a fall in annual real wages over the December quarter – down by 0.3% and the first fall since the June quarter of 2014 – and likely to reach record low levels over coming quarters.

An increase in interest rates without the usual precondition of consistently strong wages growth will clearly impact household budgets already straining under the highest price increases in over ten years.

ALSO READ: How will rising interest rates affect our rental markets?

 

About Dr Andrew Wilson, Chief Economist of www.MyHousingMarket.com.au is widely regarded as Australia’s leading property economist.
2 comments

Interesting times

0 replies

Well so the reserve bank goes back on their statements for the last year or two, saying interest rates won't go up till 2023 or 4, so people went out and invested, so NOW they admit they were wrong, well that's not good enough. Also the fuel companie ...Read full version

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