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Australia & New Zealand Economics Weekly

Australia & New Zealand Economics Weekly

More 50bp hikes coming

We agree with RBA governor Phillip Lowe that market pricing for the Cash rate looks too aggressive. But we also think the consensus is still too dovish. After all, Governor Lowe is starting to grow concerned that wage growth will be too strong to allow the Bank to meet its target. And the RBA is still lagging behind a number of its peers in its hiking cycle. We therefore expect the RBA to hike rates to a peak of 3.1%, higher than the analyst consensus of a peak of 2.60%.

24 June 2022

Australia & New Zealand Economics Weekly

Inflationary pressures keep building

The big minimum wage hike announced by the fair work commission this week will lead to higher wage growth over the coming year. Given the tightness in the labour market and rising cost pressures, businesses will be forced to pass that rise onto consumers. That suggests the risks to our forecast that inflation will peak just above 7% in Q3, are tilted to the upside. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now  

17 June 2022

Australia & New Zealand Economics Weekly

RBA could raise rates even faster than we anticipate

We’ve long been arguing that the RBA will lift rates more sharply than most analysts anticipate and the RBA’s surprise 50bp rate hike this week is consistent with our view that rates will reach 3% by early-2023. We’ve pencilled in additional 50bp hikes in July and August, but with inflation set to accelerate further, consumption growth still very strong and the labour market remaining very tight, the risk is clearly that the Bank will continue to hike aggressively for even longer.

10 June 2022
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Australia & New Zealand Economics Weekly

Mining’s heydays are over

Mining accounted for less than 10% of GDP last quarter for the first time since 2015 and with mining firms not responding to soaring commodity prices with higher investment, that decline has further to run. Indeed, we think that efforts to decarbonise the global economy will result in mining’s share of output falling to 5% by 2050. While Australia is well placed to cope with lower export revenue, a shrinking mining sector will be a drag on productivity. As such, the incoming Labor government has its work cut out to improve the long-run prospects for the economy.

Australia & New Zealand Economics Weekly

Soaring inflation to trump sluggish activity for RBA

While the economic data released this week were a mixed bag, we think that soaring inflation will trump any slowdown in activity. Indeed, with wholesale electricity prices surging to record highs, it now seems likely that utilities bills will become a major source of price pressures, too. We now expect inflation to surpass 7% in Q3, which may well force the Reserve Bank of Australia to do series of rate hikes larger than the 25bp increase in May before long.

Australia & New Zealand Economics Weekly

Wage growth still set to approach 3% by year-end

While wage growth is set to reach 3% by the end of the year, this week’s labour market data didn’t contain any upside surprises that would convince the Reserve Bank of Australia to accelerate its hiking cycle at the upcoming meeting in June. Meanwhile, the opposition Labor party looks on track to win the federal election on Saturday. While Labor has only pledged slightly looser fiscal policy that would easily be offset by likely upward revisions to tax revenue, the party’s historical track record suggests that the budget deficit would shrink less rapidly than under the Coalition government over the coming years.

Australia & New Zealand Economics Weekly

Minimum wage to rise by 4% this year

Suggestions by Labor leader Albanese that minimum wage increases in line with inflation plus productivity growth are sustainable are wide of the mark at a time when consumer prices are rising twice as fast as the RBA would like them to. But with even employers supporting a large minimum wage hike, we now expect the Fair Work Commission to lift the minimum wage by 4% next month. While that would reduce the hit to household incomes from soaring living costs, it would add to the upward pressure on inflation. ANZ Drop-in (19th May, 07:00 BST/14:00 SGT): Join economists from our Australia and Markets services shortly after the release of Q1 labour market data on 18th May for a discussion about the Australian growth, inflation and monetary policy outlook. Register now.

Australia & New Zealand Economics Weekly

Rates will rise faster than most expect

The RBA started its hiking cycle at its meeting this week. While the Governor indicated that the Bank was likely to stick to 25bp hikes in the near term, we think the Bank will hike by a larger 40bp in August after another upside surprise in the Q2 CPI data. Along with 25 bp hikes at every other meeting this year that would take rates to 2.25% by the end of this year. And we now think rates will peak at 2.75% next year, much higher than the consensus expects. China Drop-In (12th May, 09:00 BST/16:00 SGT): Join our China and Markets economists for a 20-minute discussion about near to long-term economic challenges, from zero-COVID disruptions to US-China decoupling. Register now.

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