RBA to stay patient before lifting rates

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

Reserve Bank governor Philip Lowe does not expect the Omicron variant to derail Australia’s economic recovery but says the central bank board is prepared to remain patient before lifting the cash rate.

As widely expected by economists at the RBA’s first board meeting of the year, it left the cash rate at a record low 0.1 per cent and is ending its multi-billion dollar bond buying program on February 10.

The program aimed to keep market interest rates and borrowing costs low.

“Ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates,” RBA governor Philip Lowe said in a statement after the meeting.

“The board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

Economists and financial markets had expected Dr Lowe to provide a more definite outlook for the cash rate after the unemployment rate dropped to 4.2 per cent, a year earlier than the RBA had been predicting, while inflation is also running well ahead of its expectations.

Financial markets have been pricing in the risk of a rise in the cash rate by mid-year, while economists had been gravitating towards a move at the August board meeting.

“As the board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range,” Dr Lowe said.

He said while inflation has picked up, it is too early to conclude that it is sustainably within the target band.

“There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved,” he said.

“Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target.”

EY chief economist Jo Masters said the RBA board remains a long way from financial market expectations about the timing of the first rate.

“It’s clear that policymakers want to see wages growth accelerate to be confident that inflation will remain within the target band, as supply disruptions fade,” she said.

Key December quarter wages data is due on February 23.

Dr Lowe said the Australian economy remains resilient and spending is expected to pick up as Omicron case numbers trend lower, but he conceded the main source of uncertainty continues to be the pandemic.

The RBA now expects economic growth of around 4.25 per cent over 2022 and two per cent over 2023.

This is lower than the RBA’s central case predicted in November when it had forecast growth of 5.5 per cent and 2.5 per cent respectively.

However, it has upgraded its annual underlying inflation forecasts after the unexpected jump to 2.6 per cent as of the December quarter, predicting 3.25 per cent in coming months before declining to around 2.75 per cent over 2023.

The central bank had previous not expected underlying inflation to hit 2.5 per cent until the end of 2023.

“One source of uncertainty is the persistence of the disruptions to supply chains and distribution networks and their ongoing effects on prices,” Dr Lowe said.

“It is also uncertain how consumption patterns will evolve and how this will affect the balance of supply and demand, and hence prices.”

Dr Lowe will get the opportunity to flesh out his expectations for the outlook when he addresses the National Press Club in Sydney on Wednesday.

The RBA will also release its quarterly statement on monetary policy on Friday which will provide its full suite of forecasts.