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Australia's central Bank is very close to increasing rates as inflation increases, minutes show

Australias central Bank is very close to increasing rates

April 20, 2022: -On Tuesday, Australia’s central bank is very close to increasing interest rates for the first time in over a decade as inflation accelerates and a tightening labor market nudges wage growth higher, minutes of its April policy meeting showed.

The Reserve Bank of Australia’s Board saw core inflation over the Bank’s 2-3% target range in the March quarter, and firms were expecting to pass on price rises to consumers. Wage growth was still lagging but picked up as the unemployment rate decreased to 4%.

“These developments have brought forward the timing of the first increase in interest rates,” the minutes showed. “More than coming months, important additional evidence will be available on both inflation and the evolution of labor costs.”

Data for consumer prices are due on April 26, and analysts suspect that core inflation increased by 1.0% or more in the first quarter to lift the annual pace to almost 3.2%.

That would be the first-time core inflation topped the RBA’s 2-3% target band since early 2010, which makes it harder to justify retaining rates at an emergency of 0.1%.

Key figures on wages for the March quarter are out on May 18, while data on the gross domestic product on June 1 would provide broader evidence on labor costs.

“While the Q1 wage index will still show subdued salary growth, we think it will be trumped by rapidly rising inflation. We’re sticking to our long-held forecast that the Bank will start its tightening cycle in June,” said Marcel Thieliant, a senior economist at Capital Economics.

Also, markets are wagering heavily on a rate increase to 0.25% at the RBA’s June 7 policy meeting and have nearly seven more hikes to near 2.0% implied by year-end.

That aggressive outlook reflects expectations that the U.S. Federal Reserve will hike by 50 basis points in May and June, which adds to pressure for other central banks to follow.

Central banks from New Zealand and Canada recently hiked by half a point, which cited the need to restrain inflation expectations.

Any RBA rate increase would be a shock for local borrowers, given they have not seen an official increase since 2010, and households sit on record levels of mortgage debt.

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