The case for back-to-back hikes by the RBA

Data released this week continue to indicate that the Australian economy is running up against capacity constraints. The relatively modest pickup in wage growth last quarter belies the fact that unit labour cost growth is far too strong to be consistent with the RBA's 2-3% target. Meanwhile, the labour market is also tightening, with the jobless rate trending lower and hours worked rising strongly. Given that it has been a reluctant hiker, we still think the RBA will wait until May to raise rates again. However, a compelling case can be made for the Bank to tighten policy as soon as its next meeting in March.