Traders who bet that the RBA will soon raise rates may be burned

But such strong inflation outcomes would be a significant shock given the lack of upward pressure on wage prices. A lack of exit in the labor market compared to economies like the US keeps Aussie wage growth down. Then there is the fact that much of the local wage setting process is based on long-term contracts with a ceiling of 2.5 per cent. or less in some cases.

“Our view is that inflation here is unlikely to accelerate to anywhere near the level seen in places like the United States,” said Hayden Dimes, an economist at ANZ Bank. “While we expect wages to accelerate, we do not think they will reach US levels for some time.”

These prospects are widely shared by economists in a Bloomberg study, which shows that overall CPI is seen above the midpoint of 2.5 percent this year and will remain high in 2022, but then fall back to 2.3 percent the following year. Wage growth is expected to barely reach 3 percent in 2023.

The swaps markets fully price an increase of 15 basis points in May, which will bring the cash rate to 0.25 percent from the current record low of 0.10 percent, then two more quarter-point increases – with a chance of a third – – in the rest of 2022

Benchmark three-year bond yields have fallen about 30 basis points from a high of 1.28 percent at the end of last month, suggesting that the most aggressive bets from traders are being scaled down as Lowe maintains a consistent line. The interest rate on 10-year bonds has fallen slightly less, which has led to a modest flattening of the yield curve.

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Lowe says wage growth is likely to need to be 3 percent or higher to maintain inflation around the 2.5 percent target. Yet the RBA’s determination has already been tested by the markets, and investors were right when the central bank dropped its return target at the November 2 political meeting.

Lowe has not completely ruled out a scenario where inflation rises sufficiently to justify an increase next year.

“The probability of settling the decades-long decline in wage growth in just six months is very low, it is not zero but close to zero,” he said last week.

Bloomberg

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