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Commodities rally putting pressure on RBA

Commodities rally putting pressure on RBA

Tim Stewart
— 1 minute read

A commodity-driven spike in Australia’s nominal GDP is putting the Reserve Bank of Australia under increased pressure to hike interest rates, says Nikko Asset Management.

Australia has seen strong growth in nominal GDP in the past year, thanks largely to the strong rally in commodities prices, according to Nikko Asset management fixed income portfolio manager Chris Rands.

The commodities rally is likely to continue for the next two quarters, Mr Rands said – but whether it continues longer than that will be down to Chinese demand.

Either way, the bright outlook for Australian economy over the next two quarters could potentially give rise to a more hawkish RBA than the market expects, he said.

Few economists are expecting the RBA to hike interest interest rates in the near future given the bank's fears about further stoking domestic house prices.

But the sharp divergence between nominal GDP and the official cash rate (which have traditionally moved in lockstep) suggests it will be weighing on the RBA's mind.

"In a strong nominal GDP environment, the RBA is typically either hiking rates or keeping them on hold," said Mr Rands.

"Over the past five years, the cash rate has been moving in only one direction, and this new information could see the RBA taking a more hawkish tone than what the market is expecting," he said.

The question for investors (and the RBA) is whether the rally in commodities that is driving nominal GDP growth is sustainable, Mr Rands said.

"If the commodity sector has been driven by Chinese fiscal expansion, this momentum could begin to run out during the second half of this year," he said.

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Commodities rally putting pressure on RBA
Nikko Asset Management, Chris Rands
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