SYDNEY, March 3 (Reuters) – Australia’s top central banker on Tuesday said an increase in interest rates was possible this month if the policy-making board decided inflation expectations were at risk of becoming unanchored, and markets should be aware of that.
Speaking at a business conference in Sydney, Reserve Bank of Australia Governor Michele Bullock emphasised the board would not necessarily wait for the full first-quarter reading on inflation due in late April before deciding on whether to tighten.
“I’m not making a prediction about March but it will be a live meeting,” Bullock told the Financial Review Business Summit. “We have inflation at 3.8%, headline, and we have unemployment at 4.1, tight. The board will be actively looking whether or not it needs to move more quickly.”
Markets have tended to assume the central bank would wait for the first-quarter consumer price report due on April 29 before deciding whether to lift rates again at its May 5 board meeting.
Bullock said she wanted to “dissuade” markets from thinking like that, adding that there is a risk that inflation expectations may start to move given the likely supply shock from the Middle East conflict and already elevated inflation.
The market was still only pricing in a 27% chance of a quarter-point rise in the 3.85% cash rate this month, following the RBA’s first hike in February.
Yet it is now fully priced for a rise to 4.10% in May and implies rates around 4.26% by the end of the year.
Markets are now focussed on the fourth-quarter gross domestic product report due on Wednesday where forecasts are centred on a solid economic expansion of 0.6%. Risks are now titled to the upside given data on Tuesday showed net exports proved to be a smaller drag on growth, while government spending added more than forecast.
Asked about the implications of the conflict in the Middle East and the rise in oil prices, Bullock noted Australia was a net energy exporter which gave the economy a buffer.
However, she cautioned that if the rise in global energy prices was prolonged that could weigh on consumer demand and economic growth, while also putting upward pressure on inflation.
(Reporting by Wayne Cole and Stella Qiu; Editing by Chris Reese, Sonali Paul and Shri Navaratnam)
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