The strong April jobs report is expected to influence the Reserve Bank’s (RBA) June rate decision, with economists widely predicting a 40-basis point hike will boost the cash rate to 0.75 per cent.
The Australian Bureau of Statistics (ABS) reported on Thursday that the unemployment rate reached 3.9 per cent during April, the lowest rate since 1974.
And while March quarter wages growth, reported by the ABS a day earlier, was on the soft side, the tight labour market suggests an acceleration in wages growth ahead.
According to AMP’s Shane Oliver, a predicted lift in wages, combined with the RBA’s concerns that inflation psychology might rise, is expected to influence the pace of tightening.
“We expect a 0.4 per cent hiking taking the cash rate to 0.75 per cent. By year end we continue to see the cash rate rising to between 1.5 per cent and 2 per cent,” Dr Oliver said.
Similarly, VanEck’s head of investment and capital markets, Russel Chesler, believes that the bank is now in inflation chasing mode.
“We believe that with the employment market continuing to tighten, and no signs of inflation easing, the RBA is likely to raise interest rates by 40 basis point at its June meeting,” Mr Chesler said.
Reflecting on what rising interest rates mean for equity markets, Mr Chesler said investors may need to reassess their portfolios.
“We expect gold and infrastructure companies, which generate inflation-linked income, to perform well in this environment of rising inflation and interest rates," said Chesler.
He does, however, maintain the expectation that the local share market is likely to continue to outperform its US counterpart.
“Inflation remains a bigger problem in the US, with the job market there tighter and wages growth higher,” Mr Chesler said.
According to HSBC’s assessment post Wednesday’s wage data, it was the CPI figures that turned the RBA “more hawkish” rather its conviction that wages growth was picking up strongly. This conviction, however, raises further questions about the RBA's recent style of forward guidance, HSBC’s chief economist Paul Bloxham said.
Commenting on the unemployment data on Thursday, Mr Bloxham explained that the key question for the RBA at the moment is how quickly the tight labour market will translate through to higher wages growth.
The HSBC sees 25-bp hikes in June, July and August, and another in November - taking the cash rate to 1.35 per cent.
Similarly, Barclays expects the bank to increase the cash rate “relatively aggressively” until it reaches the pre-COVID level of 1.5 per cent, but it, too, expects a 25-bp rise in June.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
