Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)
The Reserve Bank of Australia has left the cash rate at 0.1 per cent after its monthly board meeting, and has indicated a rate hike is still some time away, defying the expectations of financial markets.
However, there was a slight change of wording in RBA governor Philip Lowe’s post-meeting statement on Tuesday, having for months saying a move was unlikely before 2024.
He still wants to see actual inflation sustainably within the two to three per cent inflation target, which will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.
“This is likely to take some time. The board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2.5 per cent at the end of 2023 and for only a gradual increase in wages growth,” he said.
Financial markets and some economists have been speculating on a possible rate rise as early as next year following last week’s inflation data showed the underlying measure had jumped to 2.1 per cent and within target.
This was the strongest result in six years.
Dr Lowe said inflation has picked up, but in underlying terms it is still low and only a gradual increase is expected.
“The main uncertainties relate to the persistence of the current disruptions to global supply chains and the behaviour of wages at the lowest unemployment rate in decades,” Dr Lowe said.
However, the central bank is no longer targeting the three-year bond yield aimed at keeping market rates in line with the cash rate, but will retain its bond buying regime at $4 billion a week until at least mid-February 2022.
“The decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target,” Dr Lowe said.
“Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished.”
The RBA will release its quarterly statement on monetary policy on Friday, and Dr Lowe revealed some of the forecasts it will include.
The central bank is now expecting growth of three per cent over 2021, down from a forecast of four per cent it made three months ago.
However, for 2022 it now sees growth of 5.5 per cent, up from 4.25 per cent previously.
“The Australian economy is recovering after the interruption caused by the Delta outbreak,” Dr Lowe said.
“As vaccination rates increase even further and restrictions are eased, the economy is expected to bounce back relatively quickly.”
The unemployment rate is expected to trend lower over the next couple of years, reaching 4.25 per cent at the end of 2022 and four per cent at the end of 2023.
It was 4.6 per cent in September.