A swift series of rate hikes on the cards

The Reserve Bank of Australia has set the scene for a steady climb in interest rates to curb inflation and concedes this will weigh on household budgets.

In its quarterly statement on monetary policy, and just days after raising the cash rate for the first time in over a decade, it predicts inflation will jump to six per cent by the end of the year after its recent rapid rise to 5.1 per cent.

Underlying inflation is also expected to be 4.75 per cent at year-end, well above the RBA’s two to three per cent target.

The statement came as the Bank of England raised its key interest rate again while forecasting UK inflation surging to 10 per cent, and after the US Federal Reserve lifted its rate by the biggest margin in 22 years earlier in the week.

“All of that is a reminder just how volatile and uncertain the world is,” Federal Finance Minister Simon Birmingham said.

The RBA raised the cash rate to 0.35 per cent at its monthly board meeting from an emergency record low of 0.1 per cent, which had been in place since November 2020.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time, this will require a further lift in interest rates over the period ahead,” an RBA statement said.

Commonwealth Bank head of Australian economics Gareth Aird said the upgrades to inflation has completely changed the outlook.

“The RBA are now inflation fighters, much like many of their other central bank counterparts,” he said.

“It means that a swift series of rate hikes could follow this week’s initial hike.”

CBA is expecting 25 basis point rate hikes in June, July, August and November 2022, taking the cash rate to 1.35 per cent.
It then expects a further 25 basis point rate hike in February 2023.

“Increases in interest rates and consumer prices are anticipated to weigh on households’ budgets over the forecast period,” the RBA warned.
One factor that has been holding

back the RBA from raising interest rates earlier and prior to the spike in inflation has been subdued wages growth.

But now the RBA expects private sector wages growth will be stronger than forecast a few months ago due to a tightening labour market.

It expects wages to grow by three per cent by the end of 2022 and be 3.25 per cent by mid-2024, which would be the fastest pace since 2012.

Wages were growing at just 2.3 per cent at the end of 2021 but the next set of wage growth figures are due for release on May 18.

Even so, wages will still be lagging the rate of inflation in the near term.