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Labour market's outperformance expected to yield another 50-bp rate hike

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Economists widely expect a 50-basis point rate hike in July following the labour market’s outperformance in May.

Economists are confident that a stronger than expected increase in employment in May and the Fair Work Commission’s larger lift in the minimum wage are expected to re-affirm the central bank’s resolve to further seek to rapidly withdraw its monetary stimulus.

“We see the RBA lifting cash rate by 50 basis points (bps) in July and see further hikes in August, November and February,” the HSBC’s chief economist for Australia, NZ and global commodities, Paul Bloxham, said.

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Mr Bloxham explained that while the labour market clearly has considerable positive momentum at present, the headwinds are starting to appear.

“The sharp in inflation, and increased cost of living, is weighing on real household incomes, which we expect is likely to slow economic growth.

“Rising interest rates are also set to slow growth, as they weigh on disposable incomes and also drive a hefty fall in housing prices,” he explained.

“We see employment growth slowing in coming quarters. At the same time, the re-opened border is set to see a gradual return of workers from offshore, which should boost labour supply,” Mr Bloxham continued.

AMP’s Shane Oliver agreed that another 50-bp hike is coming in July.

Commenting on the rise in employment by 60,600 in May compared to market expectations for a 25,000 lift, Dr Oliver said the RBA is on track to raise rates again at its July meeting.

"Given the RBA’s increasing concern about inflation and the need to prevent inflation expectations moving higher, we expect another 0.5 per cent in July.

"While the move by the Fed to hike by 0.75 per cent at its June meeting suggests a risk that the RBA may do the same as it faces similar pressures to the US, we lean to the view that that will be avoided in Australia given that the RBA meets monthly whereas the Fed meets six weekly and so the RBA does not need to hike as much as the Fed at each meeting to achieve the same over a three-month period, and inflation and wages pressures are a bit less in Australia than they are in the US,” he explained.

Dr Oliver continues to see the peak in the cash rate being around 2.5 per cent, but he conceded that it could come earlier given the RBA’s shift towards a more aggressive approach.

“Having the lowest unemployment rate in 48 years is good news – but the comparison to 1974 is not necessarily good given the stagflation that followed.

“But the 1970s experience does highlight the need for the RBA to act quickly to make sure inflation expectations do not rise significantly because if they do it will be much harder to get inflation back down. And it now appears that they are well aware of that lesson,” Dr Oliver said.

The CBA too has reiterated its expectations for a hike of 50 bps by the RBA next month, bringing the cash rate to 1.35 per cent.

 

Labour market's outperformance expected to yield another 50-bp rate hike

Economists widely expect a 50-basis point rate hike in July following the labour market’s outperformance in May.

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Maja Garaca Djurdjevic

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.

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