But such strong inflation outcomes would be a significant shock given the lack of upward pressure on prices from wages. A lack of churn in the labour market compared with economies like the US keeps Aussie wage growth down. Then there’s the fact that much of the local wage-setting process is based on long-term contracts with a 2.5 per cent ceiling, or less in some cases.
“Our view is that inflation here is unlikely to accelerate to anywhere near the levels seen in places like the US,” said Hayden Dimes, an economist at ANZ Bank. “Though we expect wages will accelerate, we don’t think it will reach US levels for some time.”
That outlook is largely shared by economists in a Bloomberg survey that shows headline CPI is seen above the 2.5 per cent midpoint this year and staying high in 2022, but then slipping back to 2.3 per cent the following year. Wages growth is forecast to barely hit 3 per cent by 2023.
Swaps markets are fully pricing in a 15 basis-point hike in May that would take the cash rate to 0.25 per cent from the current record-low 0.10 per cent, then two more quarter-point rises — with the chance of a third — over the remainder of 2022.
Benchmark three-year bond yields have dropped about 30 basis points from a high of 1.28 per cent late last month, suggesting the most aggressive bets from traders are being scaled back as Lowe maintains a consistent line. The yield on 10-year bonds has slipped by a slightly smaller amount, bringing a modest flattening in the yield curve.
Lowe says wages growth probably needs to be 3 per cent or higher in order to maintain inflation around the 2.5 per cent target midpoint. Still, the RBA’s resolve has been tested by markets already and investors proved right when the central bank dropped its yield target at the November 2 policy meeting.
Lowe has not completely ruled out a scenario where inflation quickens sufficiently to warrant a hike next year.
“The probability of unwinding the decades-long decline in wages growth in just six months is very low, it’s not zero, but close to zero,” he said last week.
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