Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Central bank says rate rises have been brought forward
Rising inflation and an expected acceleration in wages growth could fast forward a rise in interest rates, according to the Reserve Bank of Australia, with some experts tipping a rate rise as soon as May.
“Inflation had picked up and a further increase was expected, with measures of underlying inflation in the March quarter expected to be above 3 per cent. Wages growth had also picked up,” the Reserve Bank said in its April monetary policy meeting minutes, released this week.
“These developments have brought forward the likely timing of the first increase in interest rates,” the central bank said. Reflecting expectation of rising official rates, yields on government bonds have jumped in recent times.
“Given the tightness of the labour market, a further pick-up in aggregate wages growth and broader measures of labour costs is in prospect. This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of labour costs at historically low levels of unemployment,” the RBA Governor Phillip Lowe said earlier this month.
The March unemployment rate sat at just 4.0 per cent, its lowest level since 2008. Bjorn Jarvis, head of labour statistics at the ABS, said the jobless rate continued to fall faster for women than for men. “The unemployment rate for women fell from 3.8 per cent to 3.7 per cent, the lowest it has been since May 1974. It remained at 4.2 per cent for men, its second lowest level since November 2008 and just above the rate from December 2021 of 4.1 per cent,” Mr Jarvis said.
Successive rate rises expected
The Reserve Bank forecasts the unemployment rate will fall below 4 per cent this year and to remain below 4 per cent in 2023. While wages growth has picked up, it remains at relatively low levels. However, experts are still tipping the central bank to raise interest rates three times this year and as many as three times again in 2023 given that inflation is rising quickly.
VanEck portfolio manager Cameron McCormack said while the Reserve Bank may be reluctant to raise interest rates at its May 3 meeting during an election campaign, it has done this before in November 2007. “So, we can’t rule it out; Q4 2021 headline inflation was 3.5 per cent and the Q2 2022 print is likely to be above 4 per cent. The UBS supermarket survey found that food prices at Woolworths rose by 4.3 per cent during the March quarter, so grocery prices are racing ahead.”
Economist Steve Miller, adviser with GSFM Funds Management, also believes the central bank could raise interest rates as soon as May. Quoting forecasts from National Australia Bank economists, who expect core inflation to hit 1.2 per cent for the March quarter and 3.4 per cent over the year, he says: “An outcome close to the NAB prediction would blow the RBA’s February Quarterly Statement on Monetary Policy forecasts out of the water. Abstracting from any fuel excise cut, these numbers suggests that by mid-year core inflation will be well out of the 2 per cent to 3 per cent [target RBA] band at closer to 4.0 per cent on an annual basis.
“The above scenario unambiguously intensifies the risks of waiting too long; being too “patient”. Most of the economic commentariat have pencilled in June as the most likely point for a policy rate lift-off giving the RBA Board the benefit of viewing the March quarter Wage Price Index released on 18th May. However, there is evidence of rapid acceleration in wages already.
“The RBA looks to be keenly aware of this … The RBA May meeting must be considered “live,” Miller said.
Westpac Bank thinks the RBA will wait until June to raise rates. The bank has forecast three consecutive rate hikes will take place in June, July and August 2022, bringing the cash rate to 0.75 per cent. Two further hikes are then expected to take place in October and November with the cash rate expected to sit at 1.25 per cent by the year’s end.
Looking to next year, Westpac predicts the RBA would lift interest rates by 25 basis points in February, May and June. This would bring the cash rate to 2.00 per cent. “The three hikes in 2023 will be in the context of accelerating wage pressures with the annual rate reaching 4 per cent by mid-2023,” chief economist Bill Evans said. The other three big banks also expect the RBA to start raising official rates from June 2022 from historically low levels, with successive right rises through the second half of 2022 and through to 2023, taking official cash rights towards 2.5 per cent.
