Inflation brings forward timing on rate hikes: RBA

The rise in inflation has likely brought forward the timing of an increase in the cash rate, the Reserve Bank of Australia has warned.

In the minutes of its April board meeting, the RBA said it expected a further increase in inflation, with measures of underlying inflation in the March quarter expected to be above three per cent - above the two to three per cent target.

“These developments have brought forward the likely timing of the first increase in interest rates,” the minutes said on Tuesday.

“Over coming months, important additional evidence will be available on both inflation and the evolution of labour costs.”

The consumer price index for the March quarter is due on April 27, while the wage price index for the same period is released on May 18.

“Consistent with its announced framework, the board agreed that it would be appropriate to assess this evidence and other incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with the target,” it said.

Economists are generally expecting the cash rate to increase by 0.15 per cent to 0.25 per cent at the June board meeting, ending a gradual decline in rates stretching back a decade.

However, there are concerns a very strong inflation result could see the cash rate jump by 0.4 per cent to 0.5 per cent at the May board meeting, even though it would be in the middle of a federal election campaign.

“Overall, the growth outlook remained positive for this year and next,” the minutes said.

“At the same time, rising prices were impinging on households’ spending power and the floods had been very disruptive for many communities.”

Noting the four per cent unemployment rate, the RBA said a further strengthening of aggregate wages growth and broader measures of labour costs was expected.

The pick-up was still expected to be only gradual, although there was uncertainty about the behaviour of wages at historically low levels of the unemployment rate.

Board members also noted that limited availability of skilled labour was one factor constraining the capacity of firms in the resources industry to undertake new capital works.

Prime Minister Scott Morrison said the inability to have a skilled immigration intake over the last few years due to the pandemic has caused some shortages.

He told a mining leaders event in Perth he expects it will take some time for the pipeline of people coming to Australia to build up again.

“I suspect we will see a great interest in people coming to Australia from eastern Europe in the years ahead,” he said.

“I think there is an opportunity to encourage people from eastern Europe very much as we saw in the post-war era.”