The Cash Rate Climb Begins – May 2022
After more than a year at the 0.1% cash rate base camp, the RBA has begun its treacherous hike in a bid to curb fears of excess stimulus and inflation. Linking arms with other central banks around the world, the reserve bank oversaw a 25 basis point rise in the cash rate, the first of many expected along the journey. In particular, the RBA cited wage growth and labour market resilience as key impetuses behind the decision, while all three major economic objectives in growth, unemployment and inflation have displayed tendencies supporting monetary normalisation
Unemployment has declined to a seasonally adjusted 4%, with expectations of further decreases to 3.5% by 2023, while job vacancies have been at an all-time high. This has occurred against the backdrop of rising wage growth, a signal of the economy edging toward full capacity. Specifically, private sector firms have demonstrated sizeable increases in wage outcomes, attributed to tighter labour market conditions and competition among hiring. This suggests a normalisation of the Phillips Curve relationship, with wage growth funnelling through to higher cost-push pressures across the economy.
On the inflation side, headline inflation spiked to 5.1% alongside underlying inflation at 3.7%, far beyond target range. The inflationary outcomes reflect a combination of domestic and global factors. Specifically, supply-side disruptions remain a major price headwind, while firms are more readily passing on costs through consumer prices. Expectations for inflation remain elevated at around 6% and 4.75% for headline and underlying respectively, inclusive of interest rate forecasts, suggesting price pressures are here to stay across 2022.
For growth, the outlook is positive, though moderate by ongoing uncertainties globally. Persistent Covid disruptions from China and the war in Ukraine represent material risks to growth forecasts, while inflation continues to hamper consumer purchasing power. GDP is expected to grow by 4.25% over 2022, before stabilising around 2% throughout 2023. Nonetheless, signs of business investment and higher national income from commodity prices can be expected to support growth across the year.