The Reserve Bank left interest rates steady and made it clear it will not be forced into lifting them by the current rise in inflation – a stance not unexpected even though it said its $4 billion a week bond buying or quantitative easing campaign would end on February 10.
In his post meeting statement Governor Phil Lowe also again used the word ‘patient’ to characterise the central bank’s policy stance, indication that so far as interest rate levels are concerned, the RBA is not in the mood for an increase for some time.
He also again emphasised the desire of the central bank to see a sustained lift in wages which he said was “some time” away.
“Ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates,” the governor said in yesterday’s statement.
“As the Board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. 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.
“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.
“Wages growth has picked up but, at the aggregate level, has only returned to the relatively low rates prevailing before the pandemic. A further pick-up in wages growth is expected as the labour market tightens.
“This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of wages at historically low levels of unemployment.”
The weak wage growth is despite continuing strength in the labour market over the next year or so.
“The labour market has recovered strongly, with the unemployment rate declining to 4.2 per cent in December. Hours worked are estimated to have declined significantly in January due to the Omicron outbreak, but high numbers of job vacancies suggest further gains in employment over the months ahead.
“The RBA’s central forecast is for the unemployment rate to fall to below 4 per cent later in the year and to be around 3¾ per cent at the end of 2023.”
The statement admitted that the rise in inflation had surprised the central bank.
“Inflation has picked up more quickly than the RBA had expected, but remains lower than in many other countries. The headline CPI inflation rate is 3.5 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions to global supply chains.
“In underlying terms, inflation is 2.6 per cent. The central forecast is for underlying inflation to increase further in coming quarters to around 3¼ per cent, before declining to around 2¾ per cent over 2023 as the supply-side problems are resolved and consumption patterns normalise.
“One source of uncertainty is the persistence of the disruptions to supply chains and distribution networks and their ongoing effects on prices. It is also uncertain how consumption patterns will evolve and how this will affect the balance of supply and demand, and hence prices.”
“The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve,” Governor Lowe pointed out, again.
Dr Lowe will address the National Press Club later today from Sydney to further explain the bank’s views for the rest of this year.
