St.George’s Monthly Economic Outlook for May indicated that the RBA is concerned a pick-up in mining investment could exert pressure on wages and other costs.
“With underlying inflation now expected to exceed its 2-3% target by 2013, the RBA looks poised to raise interest rates soon,” it said.
While St.George is standing by its long-held forecast for a rate hike in August, the bank says there is a possibility policymakers could pull the trigger sooner.
“Recent RBA rhetoric has been more hawkish than previously with stronger references to inflationary pressures building,” it noted. “Importantly, the RBA expects underlying inflation to be towards the top of its 2-3% target by the end of this year, and to exceed 3% by 2013. It means there is little room for error on the inflation front for policy makers.”
The RBA is also considering cautiousness in household spending and a softening in the housing market. As well, it is taking into account the effects of the natural disasters earlier this year and the temporary disruptions to economic activity.
The RBA’s Statement on Monetary Policy has led several analysts to shift their forecasts – a survey conducted in mid-May found six out of 17 are calling for a June rate hike. Interbank cash rate futures are tipping a 17% chance of a June rate hike.
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