Australia & New Zealand
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Australia & New Zealand

Australia & New Zealand Economics Weekly

Australia & New Zealand Economics Weekly

Omicron could add to inflationary pressure

If Omicron were able to evade existing vaccines, a renewed period of lockdowns would be required which would force the RBA to step up its bond purchases. Inflation would fall initially as crude oil prices would continue to weaken, but disruptions to transportation networks coupled with continued strength in goods demand would add to the upward pressure on goods prices. However, for now the activity data suggest that the economy is roaring to life after the recent lockdowns and we’re sticking to our above-consensus GDP forecast of 5% for next year.

3 December 2021

Australia & New Zealand Economics Weekly

Border reopening won’t ease labour shortages much

Australia’s government isn’t keen on opening the immigration floodgates once the border reopens to migrants next year and we still expect the unemployment rate to fall to 4% by 2023. Nor do we expect migration to ease labour shortages in New Zealand much next year. Nonetheless, New Zealand’s labour market is already very tight and with the RBNZ set to keep tightening monetary policy, we expect unemployment to creep higher over the next couple of years.

26 November 2021

Australia & New Zealand Economics Weekly

Wage growth and inflation to continue to strengthen

RBA Governor Phillip Lowe doubled down on the view wage growth will remain too low to justify a rate hike anytime soon. But wages for workers on individual agreements is soaring. And we think wage growth for other workers will begin to catch up next year. We therefore reiterate our view that wage growth will approach 3% by the end of next year and that the RBA will hike rates in 2023.

19 November 2021
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Australia & New Zealand Economics Weekly

Inflation will keep the RBA under pressure

Business purchase costs in the October NAB survey rose to their strongest level since 2008, consistent with trimmed mean inflation of nearly 1.5% q/q. That probably overstates the strength in underlying inflation in the months ahead as other measure of inflation in the survey were more subdued. While we do expect strong price growth to keep pressure on the RBA to tighten monetary policy, our view that wage growth will only approach 3% by the end of next year underpins our view that the Bank will hike later and less aggressively than financial markets expect.  

Australia & New Zealand Economics Weekly

RBNZ set to hike by 50bp, RBA remains the archdove

The exceptional strength of New Zealand’s mean that we now think the RBNZ will hike rates by 50bps in November and by a further 100bps next year, which would take the OCR to 2.0%. That’s above the analyst consensus but less hawkish than market pricing as we still think falling house prices and higher debt servicing costs will weigh on consumption and dwellings investment next year. In Australia, the RBA’s persistently dovish stance has taken some of the wind out of financial markets’ sails. But we still believe that wage growth will pick up sooner than the Bank anticipates. That’s why we are sticking to our view that the RBA will first hike rates in early 2023, a year sooner than the Bank expects.

Australia & New Zealand Economics Weekly

RBA set to ditch yield target next week

The rise in trimmed mean inflation into the RBA’s 2-3% target band for the first time in six years has only added to the aggressive repricing in the outlook for the RBA’s policy rate over the past month. And given that the RBA refrained from intervening this week to prevent the yield on the April 2024 bond from surging far above its 0.10% target, we now expect the Bank to signal that rates will rise before 2024 at next week’s meeting. That means that the yield target will no longer be fit for purpose and we expect it to be ditched altogether.

Australia & New Zealand Economics Weekly

Market pricing on RBA too aggressive

Despite the rise in virus cases in recent weeks, strong inflation in New Zealand increases the pressure on the RBNZ to tighten policy further. While we are sticking to our forecast of a 25bp hike in November, there is certainly a risk that the Bank decides to hike rates by 50bps. Meanwhile, in Australia, the RBA defended its yield target this week as markets continue to challenge the RBA’s view that rates will be on hold until 2024. We’re less hawkish than financial markets but we do think wage growth will pick up faster than the RBA expects. Indeed, we expect the Bank to start hiking rates in early 2023.

Australia & New Zealand Economics Weekly

Plans to double migration sound good in theory

The new NSW premier has received advice that Australia should double the pace of migration in the coming years to make up for lost population growth. That plan would help ease labour shortages, boost tax revenue and lift GDP growth. We already expect Australia to grow by more than the consensus anticipates next year, but if Australia is able to double the pace of migration growth, GDP would be even stronger than we expect.

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