Vivek Maishra

BENGALURU, (Reuters) – Australia’s central banks will increase interest rates in the third quarter for the first time since over a decade, slightly sooner than expected a month ago according to a Reuters poll. Economists see rates rising by the year-end at 0.50% from 0.25%, as per Reuters.

Nearly all other central banks among their peers will have raised rates since record lows at the end March. In the current cycle, they have already been increased by Reserve Bank of New Zealand several times.

The Reserve Bank of Australia (RBA), however, continues to wait for indicators of wage inflation before reacting to general inflationary pressures.

Inflation in Australia was at an all-time high, with the December quarter seeing the fastest pace of annual growth since 2014. This suggests that the RBA wasn’t predicting a prolonged or benign rate of price rise.

Wouter van Eijkelenburg of Rabobank, said that inflation will continue to rise for the least half-year. “The RBA cannot afford to be patient any longer.”

The latest Reuters poll, February 18-24, showed that economists have raised their expectations of a rate increase for a fourth month. Economists expect the RBA’s key interest rate to rise by 15 basis point to 0.25% in July-September.

The forecasts of seven economists were that rates will rise to 0.50%, while two others predicted they would reach 0.75% by the end of the third quarter. This would result in borrowing costs returning to pre-pandemic levels if they were realized.

The poll revealed that 21 economists out of 28 predicted more interest rate increases, with the benchmark rate likely to rise at least to 0.50% before the end this year, and as high as 1.25% in 2023.

The rates for next year were 1.0% according to the last survey.

In an effort to boost wage growth, the RBA kept rates at record levels to sustain an economy that was hit by numerous lockdowns from the pandemic.

We are getting close to it.

Australian wages rose to 2.3% during the quarter. This was due to intense competition from workers in a tighter labour market. However, annual growth was below the 3%+ levels which policymakers believe would warrant a higher interest rate.

Inflation is rising and the labour market is tightening, which suggests that there will be a rise in rates. If the economy is recovering as anticipated, Governor Philip Lowe said that it was possible for a rate hike to occur later in the year.

The money market traders expect a rise in interest rates to 0.25 percent by June and then to 1.50% by the end of 2018. CBA, Westpac, ANZ, and NAB are all tipping a June increase.

David Plank from ANZ, who is in charge of Australian economics wrote that we can’t exclude wage growth. However, GDP data has shown enough momentum during Q1 to convince RBA that they should act sooner than the September forecast.

Analysts believe there is another reason the RBA seems to be proceeding more slowly than its central banks peers in tightening their policy.

Marcel Thieliant is a senior Australia-New Zealand economist with Capital Economics. He stated, “We expect that the Bank will refrain from hiking prior to the federal election in May …(and (also) to begin hiking in June to respond to stubbornly high inflation.”