By James Glynn


SYDNEY--With inflation proving sticky, the Reserve Bank of Australia doesn't have the option of simply holding interest rates higher for longer, with further increases now looking likely, a leading forecaster says.

"Unlike its U.S. counterpart, we don't think the RBA necessarily has the luxury of just sitting with a longer period of stable policy," Sally Auld, chief investment officer at JBWere, said in a note to clients.

The comments follow news last month of higher-than-expected inflation numbers for the first quarter, which has prompted money markets to price in some chance that the next move in the official cash rate will be higher.

"The RBA has left itself with little or no tolerance for upside surprises to inflation, and the distribution of risks to both labor market and growth outcomes looks to be shifting in a slightly stronger direction. Investors should thus be attuned to risk that further rate hikes may be required in Australia," she said.

The policy-setting board of the RBA will meet on Monday and Tuesday amid speculation that it will reverse a recent shift in the policy needle toward neutral. Interest-rate increases can't be ruled out.

The RBA is also set to absorb the federal government's budget for 2024-2025 on May 14, with economists betting it will include added spending measures to help offset the worst of a surge in the cost of living.

Potential fiscal stimulus in the budget will serve as a backdrop to a coming decision on raising the basic wage and the delivery of generous income tax cuts midyear.

"The board will probably discuss the merits of a rate rise at next week's policy meeting," Auld said.

Dynamics in both Canada and New Zealand should be sending an important signal to the RBA, she added.

In these economies, unemployment rates are now over 100 basis points higher than their cyclical troughs and inflation is at the top of or within respective central bank target bands.

In Australia, unemployment remains near its lowest level in 50 years and inflation remains well above the RBA's 2% to 3% target.

Official cash rates are 5% in Canada and 5.5% in New Zealand, compared with 4.35% in Australia.

"Perhaps a cash rate of this magnitude was what was always required in Australia for a successful disinflation," Auld said.


Write to James Glynn at james.glynn@wsj.com; @JamesGlynnWSJ


(END) Dow Jones Newswires

05-02-24 2105ET