Australia c.bank could take rates as high as 5%, warns Vanguard chief economist

By Lewis Jackson SYDNEY, Feb 16 (Reuters) - Australia's central bank could take rates as high as 5%, well above market forecasts, to combat inflation likely to hit levels seen in the United States and parts of Europe, according to the chief economist at the world's second biggest asset manager. Vanguard global chief economist Joe Davis said labour market signals, including the gaps between unemployment and job openings, suggest the Reserve Bank of Australia's (RBA) policy stance is "not close" to restrictive yet. A cash rate between 4.5% and 5% would not be surprising, although it is not the base case, he added. While the central bank has lifted rates by a hefty 325 basis points to 3.35% since May, that is well short of annual inflation at 7.8% and Davis argues wages growth has yet to peak. "Australia is not at the same level as we see in the United States and parts of Europe but given the indicators it's going there, with very high likelihood," said Davis at a media briefing in Sydney on Thursday. "I think they're behind in the cycle," he said, referring to the central bank. Vanguard manages $8 trillion, most of it in index funds. Markets expect rates to peak around 4.1% in the middle of the year before declining in 2024. Fresh jobs data on Thursday showed a labour market already showing signs of slowing. But Davis warned investors had a track record of underestimating how far rates would rise and how long they would stay high. Widespread expectations that inflation in the developed world would quickly return to 2% were unrealistic, he added. "We have been consistently ahead of the central banks and the bond market because they are underestimating the supply demand imbalance, particularly in the labour market," said Davis, who is also head of Vanguard's investment strategy group.

"We see this in Australia, we see it across every developed market we track." (Reporting by Lewis Jackson; Editing by Lincoln Feast.)

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