Hike rates

Will the RBA follow the US Fed and raise rates?

The U.S. Federal Reserve (Fed) could start raising interest rates as early as March 2022 and shrink its balance sheet in response to rising inflation, said James Bullard, chairman of the Federal Reserve Bank of St. Louis, on January 6, 2022.

Last December, the Federal Open Market Committee (FOMC) announced that it would reduce the central bank’s bond-buying program at a faster pace than announced at the November meeting, citing risks related to the rise in inflation. The FOMC had also considered reducing the central bank’s balance sheet by not reinvesting maturing securities. However, there were no discussions about the schedule.

With most central banks following in the footsteps of the US Fed, will the Reserve Bank of Australia (RBA) raise rates sooner than expected?

The RBA had previously indicated that the first interest rate hike is unlikely to occur before 2024, as the acceleration in wage growth and inflation would take some time. Let’s understand what could be the possible action of the central bank on the three key parameters – GDP growth, inflation and wage growth.

Read also : Is the RBA’s latest cash rate decision justified?

GDP growth

The RBA, in its monetary policy statement of December 7, 2021, had said that the Australian economy was recovering rapidly and should return to its pre-Delta trajectory in the first half of 2022 and the emergence of the Omicron strain, although a source uncertainty, is unlikely to derail the process of economic recovery.

However, the rate at which the Omicron strain of COVID-19 is spreading and government-imposed restrictions on public travel could derail the process of economic recovery, economists say.

Due to the wider spread of Omicron, New South Wales (NSW), Australia’s most populous state, announced certain activity restrictions on January 7, 2022. Other states may soon issue similar guidelines

It is worth mentioning here that brokerage houses have already started evaluating the impact of Omicron on the country’s GDP growth. On Friday, global brokerage Nomura cut Australia’s 2022 GDP growth forecast from 3.7% to 3%, citing fears of the South African variant of COVID. Nomura expects Australian GDP growth in the first quarter to remain stable from its previous estimate of 1.4%.

Read also : After a troubled 2021, what are the economic factors to watch in 2022?

Inflation

According to data released by the Australian Bureau of Statics (ABS), in the September quarter CPI inflation increased to 3% per annum and on a quarterly basis it stood at 0, 8%. Much of the price rise was led by energy and property prices. While energy prices are determined by global factors such as international crude prices, one of the main reasons for soaring real estate prices is extremely low interest rates. Other commodities and household items have yet to have a significant impact on the CPI numbers.

It should be noted here that, unlike the US, where inflation hit a 40-year high of 7%, headline inflation in Australia is still under control and within the RBA’s tolerance level. . Thus, the central bank should not be in a hurry to raise key rates.

Will the RBA follow the US Fed and raise rates?

Wage growth

Image source: © Ivelinr | Megapixl.com

The RBA in its November minutes said wage growth was expected to reach 3% by the end of 2023. According to data released by the ABS for the September quarter, wages rose by 2.2 % on an annual basis. This rate is much lower than that observed in the United States. The US jobs report for December shows that over the past 12 months wages have risen 4.7%, well above the expected rate of 4.2%.

Conclusion

The current economic situation in the United States probably supports the action of the American Fed to raise interest rates earlier than expected. However, the current situation in Australia does not justify the RBA’s approval of the rate hike plans. Also, the way the COVID situation unfolds in Australia, its economic recovery is very likely to be affected. Now, given this situation, it is worth watching the central bank’s next action on rates.

Read also : Does Australia face stagflation in 2022?