The “persistence of stimulus” unleashed during the COVID-19 crisis and in the budget will put “upward pressure on wages and inflation” and could force the RBA to act on interest rates, according to UBS.
“The budget means the RBA should be more willing to taper ahead of the Fed, and hence we still expect the RBA will likely announce a taper in July, with QE3 “up to $100bn”, and slower purchases until stopping ~end-year; as well as not extending yield curve control beyond Apr-24,” UBS wrote in a note to clients.
“We still expect the RBA to hold the cash rate until end-22, but we now see the risk of an earlier rate hike than the RBA’s forward guidance of 2024.”
Governor Philip Lowe has been loath to suggest that the RBA could lift rates early despite skyrocketing house prices and rising bond yields – but deputy governor Guy Debelle indicated that the bank could move sooner, saying “it is the state of the economy that is the key determinant of policy settings, not the calendar” while warning that monetary policy was not an appropriate tool for alleviating house price concerns.
“Monetary policy is focussed on supporting the economic recovery and achieving its goals in terms of employment and inflation. It is important to remember that while housing prices may not rise as fast without the monetary stimulus, unemployment would definitely be materially higher without the monetary stimulus,” Mr Debelle said.
Overseas, US Treasury secretary Janet Yellen also warned that the Federal Reserve could be forced to lift interest rates to ensure that the US economy “doesn’t overheat” before back-pedalling and saying “I don’t think there’s going to be an inflationary problem” after her comments roiled markets.
The RBA has flagged that it will use its July meeting to consider whether to retain the April 2024 bond as the three-year yield target or to shift to the next maturity, but indicated that interest rates would remain on hold until the Australian economy was progressing towards full employment – a figure that both Mr Lowe and Treasurer Josh Frydenberg believe should be in the low 4 per cent range.
