RBA sees first rate increase in 2024 as wage growth sluggish

Bloomberg

The Reserve Bank of Australia (RBA) struck an upbeat note on the economy, while maintaining that faster wages growth and inflation will take some time and the first interest-rate increase is unlikely before 2024.
The economy will expand 3% this year, despite a likely sharp contraction in the third quarter due to virus lockdowns, and then accelerate to 5.5% in 2022, the RBA said in its quarterly update of forecasts. It sees wage growth of 3% and inflation at the 2.5% midpoint of the central bank’s target by end-2023.
“A rapid trajectory of recovery from the recent setback seems increasingly likely,” the RBA said. “Depending on the trajectory of the economy at that time, the board judges that this outcome could be consistent with the first increase in the cash rate being in 2024.”
The Australian dollar falls after the report and was trading at 73.87 US cents in Sydney. Australian three-year yields falls 7 basis points to 0.90%, set for their biggest weekly drop in a decade, as traders pared bets for the pace of RBA rate hikes.
The central bank’s rate assessment is a further push back against market pricing for a tightening cycle to begin next year. The RBA did concede that there was a plausible scenario in which wages and consumer prices grew faster than expected and a 2023 rate hike was needed, but it dismissed the prospect of an increase in the next 12 months.
“The RBA has upgraded its economic forecasts but they are still cautious on the inflation and wage outlook,” said Belinda Allen, a senior economist at Commonwealth Bank of Australia, which expects the first hike to come in November next year.
Swaps traders see the first increase to the cash rate — currently a record-low 0.1% — coming by June or July of 2022. Markets now see the cash rate at 0.75% within a year, after projecting it at 1.2% in trades at the end of last week.
In its central scenario, the RBA sees wages accelerating to 2.25% at the end of this year, reaching 2.5% in 2022 and 3% in late 2023 — which would be the fastest pace since 2013, the statement on monetary policy said. Inflation was seen at 2.25% through to mid-2023 before edging up to 2.5% in December of that year. The RBA’s upside scenario shows unemployment tumbling to 3.25%, sparking a strong recovery in wages and spurring inflation above 3% by end-2023.