SYDNEY: Australia’s central bank will likely lag its peers in tightening monetary policy even though the country has been among the most successful in handling the pandemic and has emerged from its COVID-related economic slump with strong growth momentum.
Job vacancies are at a 12-1/2 year high, nearly 50% above pre-virus levels, unemployment is already close to where it was before the pandemic, consumer spending and house prices are booming and indicators of consumer and business confidence are positive.
However this upswing, led by near-zero cases of community transmission of the coronavirus since late last year, has come at a time when wage growth and inflation are at all-time lows and well below the central bank’s target.
“Inflation is also a lot further below target than in comparable countries, such as the U.S., Canada, UK and New Zealand,” HSBC economist Paul Bloxham said.
The Reserve Bank of Australia (RBA) says it wants to see underlying inflation within the mid-point of its 2%-3% target band. The latest data for the March quarter shows that measure at 1.1%, about 140 basis points below target.
By comparison, key core inflation measures that the central banks track in the United States, Canada and New Zealand are all less than 20 basis points away from their targets.
“We see the RBA as now clearly, almost solely, focused on getting inflation back to target and expect that it will continue with its highly expansionary settings for some time yet, with the aim of running the economy hot,” Bloxham added.
Indeed, RBA Governor Philip Lowe himself believes the conditions required for the board to consider policy tightening – high inflation and low unemployment – are unlikely to be met before 2024.
Stronger-than-expected macroeconomic data in recent months has prompted the RBA to upgrade forecasts for Australia’s gross domestic product and employment.
But despite the uptick in economic activity, wage growth in Australia remains stubbornly low, largely because there is still ample spare capacity in the labour market and businesses are not confident about passing on higher costs to consumers.
In the sun-drenched state of Queensland, for example, chefs are in big demand yet businesses are not in a position to lure them by raising prices to cover their wages.
“Businesses are constrained by what they can charge their customers,” said Daniel Gschwind, the chief executive of the Queensland Tourism Industry Council. “At the moment, they are in a very difficult position and under enormous financial pressure.”
The RBA is unlikely to budge on interest rates until wage growth jumps above 3%, from 1.5% now.
By comparison, the Bank of Canada last month became the first major central bank to cut back on pandemic-era money-printing stimulus programmes. Earlier this month, the Bank of England decided to slow the pace of its bond-buying, becoming the second central bank from a G7 economy to begin the slow exit from pandemic-era money-printing stimulus schemes.
Minutes of the U.S. Federal Reserve’s last meeting showed policymakers discussed that reducing the pace of asset purchases would be appropriate at some point.
Australia’s neighbour New Zealand is also likely to begin tightening soon, with analysts predicting an interest rate hike in the second half of 2022. Inflation in New Zealand is about 50 basis points below the central bank’s target mid-point of 2%.
– Reuters
