Australia & New Zealand
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Australia & New Zealand

Australia

RBA probably won’t hike before the May election

Trimmed mean inflation will probably climb above the upper end of the RBA’s 2-3% target band in Q1, which would add to the case for the RBA to start hiking rates in May. However, the RBA hasn’t changed its policy rate in an election month since it started to announce monthly policy decisions in 2008. And with wage growth set to remain below 3% for now, we expect the Bank to wait until August.  

26 January 2022

Surge in inflation will prompt first rate hike in August

The rapid tightening of the labour market coupled with the acceleration in underlying inflation will prompt the Reserve Bank of Australia to end its asset purchases at its meeting on Tuesday 1st February. And we now expect the Bank to hike rates to 1.25% by end-2023, with the first hike coming in August. Drop-In (08:00 GMT, 26th Jan): Will the RBA follow the Fed this year? Economists from our Australia and Markets services will talk through the likely path of RBA policy making in 2022 and the implications for Australian bond and currency markets. Register here.

25 January 2022

Australia Consumer Prices (Q4 2021)

The strong rise in underlying inflation at the end of last year means the RBA is all but certain to end its asset purchase scheme at its meeting next week. And with underlying inflation now above the mid-point of the RBA’s target, the Bank will come under increasing pressure to hike rates this year.  

25 January 2022
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RBA to hike rates this year

The fall in the Australian unemployment rate to 4.2% in December means the labour market is now the tightest it has been since 2008. That all but confirms our forecast that the RBA will end its asset purchase programme at its February meeting. And we now think wage growth will rise to 3% by the end of the year. With inflation set to accelerate faster than the RBA has been anticipating, we have brought forward our forecast for the first rate hike from February 2023 to November this year.  

RBNZ will ease even as RBA starts to tighten

Australia’s Omicron outbreak will hold back the recovery this quarter, but there are plenty of reasons why Australia will outperform New Zealand over the next couple of years. As the labour market has tightened more rapidly than we had anticipated, we’ve brought forward our forecast for the first RBA rate hike from February 2023 to November 2022. By contrast, we expect New Zealand’s housing market to come off the boil this year which should prompt the Reserve Bank of New Zealand to end its hiking cycle at 2.0% this year and start cutting interest rates in 2023. Our views on monetary policy are more dovish than what’s priced into financial markets so we expect 10-year government yields to be little changed. What’s more, we expect the New Zealand dollar to weaken against the Australian dollar.

Australia Labour Market (Dec. 2021)

The further decline in the Australian unemployment rate in December supports our forecast that the RBA will end its asset purchases in February.

Australia’s consumer exuberance won’t last

The strong rebound in consumer spending in November is consistent with our view that GDP surpassed its pre-lockdown peak in Q4 already. And while the Omicron tsunami seems to have resulted in a renewed slowdown in consumption, mounting staff shortages and disruptions to goods supply will result in continued strong increases in consumer prices. The upshot is that we still expect the RBA to end its bond purchases in three weeks, though the sluggishness in wage growth means we don’t expect the first rate hike until early next year.

The outlook for high-beta DM currencies in 2022

We think that rate differentials and commodity prices will be the key factors driving the relative performance of six “high-beta” DM currencies in 2022, continuing last year’s trend. We expect all these currencies to lose ground against the US dollar this year, although we think that a more hawkish Riksbank and Bank of England will mean that SEK and GBP hold up best, while our forecast of falling energy prices, especially that of European natural gas, suggests to us that NOK will do worst. Drop-In: Neil Shearing will host an online panel of our senior economists to answer your questions and update on macro and markets this Thursday, 13th January (11:00 ET/16:00 GMT). Register for the latest on everything from Omicron to the Fed to our key calls for 2022. Registration here.

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