RBA Holds its Nerve on Inflation Outlook

By Glenn Dyer | More Articles by Glenn Dyer

Despite some frantic tap dancing by business economists, media commentators and others about inflation, don’t bank on any assertions that interest rates are going to rise before 2024.

That should be the message markets and investors take from both a speech yesterday by the Reserve Bank Governor, Philip Lowe and the minutes of this month’s monetary policy meeting of the central bank.

His speech was a reworded version of both the minutes and his post meeting media conference where he made the same points – yes inflation was strong in many parts of the world, but not in Australia and made it clear the central bank is prepared to wait and wait and “be patient.”

“Our central scenario is that underlying inflation reaches the middle of the target by the end of 2023. If this comes to pass, it would be the first time in nearly seven years that we will be at the mid-point,” he said in the speech to a lunch of business economists online and in Sydney.

“This, by itself, does not warrant an increase in the cash rate. As I have said, much will depend upon the trajectory of the economy and inflation at the time.

Dr Lowe said unless productivity suddenly deteriorated, it was likely wages growth needed to be above 3% to get inflation back to the middle of the RBA’s 2%-3% cent target band.

Wages are growing at 1.7%, with the September quarter’s Wage price Index, out later Wednesday unlikely to show signs of a strengthening. In fact given the data will have been taken during the lockdowns in Sydney, Melbourne, the ACT and parts of the East Coast states, it’s possible the index will show no growth or a slight fall.

And while he said that inflation could force the bank to lift official interest rates before its 2024 target, he saw the chances of that happening as highly unlikely.

Dr Lowe said while there were signs of inflationary pressure across the globe, Australia was different in two key areas.

He said energy prices in Australia were not rising nearly as quickly as overseas, partly due to increased capacity made available by wind and solar generators.

Another major difference was Australia’s wages market, with multi-year enterprise agreements and the annual minimum wage decision creating a “degree of inertia” that prevented a sharp lift in incomes.

Without strong wages growth, it would be difficult for inflation to pick up to a point that the RBA would have to lift rates earlier than its stated 2024 expectation.

“The latest data and forecasts do not warrant an increase in the cash rate in 2022. The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest rates next year,” he said.

“It is likely to take time to meet the condition we have set for an increase in the cash rate and the board is prepared to be patient.

“It is still plausible that the first increase in the cash rate will not be before 2024.”


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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