Going into today's meeting, a patient RBA remains in contrast to markets expecting rates to start rising as early as June. Governor Philip Lowe's decision statement at 2:30PM (AEST) will be closely watched for any shift in tone from the Board, but it is likely the RBA will continue to lean against hawkish market pricing and leave the cash rate target unchanged at 0.1%.
Domestically, the key developments are in the labour market where the unemployment rate has fallen to its lowest since 2008 at 4% and conditions are likely to tighten further given the elevated volume of job vacancies. Wages growth has been slow to respond and is currently only in its range in the years prior to the pandemic when inflation consistently ran below the RBA's 2-3% target band.
However, in the March meeting minutes, the Board made the important observation that with the labour market expected to keep tightening, its outlook for wages growth was "skewed to the upside". The main uncertainty is the pace at which low unemployment feeds through to faster wages growth and, in turn, inflation. With this yet to be materialised in the data, the RBA has been reluctant to conclude that the recent return of underlying inflation to the midpoint of the target is sustainable, keeping the focus on achieving full employment.
Markets are sending a much more definitive message, priced for the first hike (a 15bps move to 0.25%) to come in June and to then be followed by 6 more hikes over the remainder of 2022, taking the cash rate to 1.75%. Then there is the extraordinary repricing that occured in the bond market over Q1 as global inflation concerns intensified following the Ukraine war, ramping up expectations for policy tightening by central banks. In Australia, the 3-year AGS yield surged by around 130bps over the quarter to 2.3%; it was only in November when the RBA abandoned its 0.1% target at this segment of the curve.
However, with inflation pressures in Australia much more subdued than in major economies offshore and wages growth yet to accelerate, the RBA is likely to reaffirm today its patience in monitoring developments.
