Cash rate move possible in July – Dr Brendan Rynne, KPMG Chief Economist, responds to RBA announcement

The RBA Board has kept the cash rate steady at 0.1 percent and we anticipate adjusting the cash rate upwards is likely to be sooner than thought, possibly in July. But when the rate rise does come, future rate increases could happen quite quickly afterwards, to catch up for the long period of ultra-low rates.

A rate rise will be ‘in play’ at every RBA meeting from July.

The RBA continues to note it wants to see sustained increases in inflation and wages growth before it looks to raise the cash rate, which in effect means the board will want to see another quarter where inflation is sitting at the top end or above the upper end of its target band (of 2 percent to 3 percent).

The Board is likely to see through the current volatility in oil prices being caused by the Russian conflict with Ukraine in interpreting the sustainability of inflation.

What is likely to be more important in any RBA considerations is wage movements. Unemployment has remained very low and is expected to be driven down further as aggregate demand expands.  While continuing low unemployment is anticipated going forward, annual wages growth is, as the RBA has noted today, still on aggregate only around the relatively low rates we saw pre-pandemic.

Anecdotal evidence is showing inflation and wages growing but these are not yet seen in the official statistics due to timing lags.

Post-pandemic global recovery is likely to be disrupted given the escalating conflict in Europe and all the associated sanctions that will have a negative consequence on world trade. This is likely to give other Central Banks cause to reconsider aggressive monetary policy tightening that was seemingly planned to take place.

But Australia’s position is different as we will see a terms of trade boost because the prices for our exports – commodities such as wheat, iron ore, coal are growing faster than import prices, apart from oil.

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