Reserve Bank of Australia governor Philip Lowe has warned investors local financial markets were at risk of an “abrupt adjustment” if surging US inflation forced the Federal Reserve to raise interest rates faster than expected.
The RBA governor affirmed his willingness to be patient before increasing the official 0.1 per cent cash rate, in contrast to money market traders pricing in five RBA interest rate rises this year.
Wall Street economists expect the Fed to raise rates by as much as 1.75 per cent this year, starting with a super-sized 0.5 of a percentage point tightening in March.Dr Lowe gave the RBA extra wriggle room to “plausibly” increase interest rates this year. He said the broader measures of wages growth were now expected to pick up “quite a bit faster” than the wage price index, which measures only base pay.
If inflation is in line with the midpoint of the RBA’s target, Dr Lowe hopes the real cash rate will rise above zero, implying a nominal cash rate of at least 2.5 per cent.“So if we just get to a zero real interest rate, then the cash rate would have to average at least 2.5 per cent because that’s what we want inflation to average,” Dr Lowe said, responding to questions from Liberal MP Jason Falinski.
Commonwealth Bank of Australia projects the neutral cash rate to be just 1.25 per cent, because highly-indebted households are much more sensitive to interest rate changes.Dr Lowe said when rates did rise, many borrowers would have repayment and saving “buffers”, wage rises and jobs, and the economy would be strong.
Wage pressures in Australia were much more subdued because labour force participation had remained near record-highs thanks to the federal government’s $90 billion JobKeeper wage subsidy retaining a link between employers and workers during the pandemic, he said.
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Source: FinancialReview - 🏆 2. / 90 Read more »