Philip Lowe, governor of the RBA, has been holding a webinar to explain the board’s decisions at its monthly board meeting today.
The central bank chief has made it clear the RBA is not about to lift its cash target rate, dismissing market predictions of a rise as soon as next March “as a complete overreaction to the recent inflation data”.
That refers to the CPI data for the September quarter that came in at 3% for the headline rate, and 2.1% for the underlying rate.
“Given our forecasts it’s still entirely plausible that the first increase in the cash rate will not be before the maturity of the current target bond [with a maturity date of April 2024],” Lowe said.
It is also now plausible that a lift in the cash rate would be appropriate in 2023.
In our central scenario, underlying inflation reaches the midpoint of the 2%-3% range only in late 23.
Wage rises had not been in the 2%-3% range for about a decade, and “things would have to change dramatically” for the bank to revise its view.
“We really want to be sure we can deliver this 2.5% rate of inflation” before the RBA acts, he said, adding the bank does not have a specific target for wage growth itself.
One reason for caution is that the Covid pandemic might not have finished in terms of its ability to throw the economy off track.
“One source of such a shock would be a new strain of the virus or a decline in vaccine effectiveness,” Lowe said.
In this case, the cash rate would need to remain at its current level for longer than otherwise.
Lowe added that today’s meeting was focused on the decision to drop its yield curve control for the 2024 bond, and it did not discuss the housing market “in any detail”, he said.
“At the moment, I don’t have any concerns about the deterioration in lending standards” for home loans, Lowe said.
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After the RBA’s statement, the dollar fell against the US currency and the stockmarket rose as investors were relieved the central bank was not more aggressive in its comments about the outlook for inflation and the potential for an early rise in interest rates.
Maxime Darmet, the director, economics at Fitch Ratings, said “it’s really like the first step we think towards the normalisation of [Australia’s] monetary policy settings, which had been very loose since the pandemic”.
Darmet said the indications the bank would wait until as late as the end of 2023 to be sure inflation would remain in the 2-3% target range was “not a big change” from previous comments about waiting until 2024.
However, he said should the recovery remain strong we could expect more adjustments sooner than the RBA forecast.
“It’s very possible that in the next meeting they would think it would be 2022,” he said.
The RBA had been relatively “dovish” in its signalling that it was not worried about inflation. However, it also couldn’t be seen to be too slow either in responding as central banks in the US, Canada and soon the UK prepare to wind back support for the economy.
“You’re seeing so much pressure on prices at a global level with energy prices spiking, with supply bottlenecks persisting and so on,” Darmet said. “It’s a very dovish central bank but starting gradually to come around to the new reality that inflation is going to be probably higher than they expected.”
While mortgage holders can take some relief from today’s RBA comments that an interest rate rise isn’t around the corner, Australia and other nations have allowed housing prices to rise too far too fast for the overall health of the economy, not to mention housing affordability for those not in the market.
“Low interest rates are the main channel through which people are taking on more debt,” Darmet said.”[It] can become a concern in terms of not only affordability for low-income households, but also it creates a lot of potential financial instability and risk.
“And this is something many central banks are not taking too seriously,” the Fitch analyst said.
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As expected the Reserve Bank of Australia has left the official cash rate target unchanged at its record low annual rate of 0.1%.
The focus of the markets and pundits alike, though, has been on the language of the accompanying statement by the RBA governor, Philip Lowe.
As expected, the recent pickup in the consumer price index has given the central bank cause to bring forward its prediction that the underlying inflation will only be “sustainably” within its 2-3% target range by 2024.
While emphasising that it remains “prepared to be patient” with rising prices, the RBA’s “central forecast” is now for underlying inflation “to be no higher than 2.5% at the end of 2023 and for only a gradual increase in wages growth”, Lowe said.
Not a huge change but one the markets will focus on.
“The Delta outbreak caused hours worked in Australia to fall sharply, but a bounce-back is now under way,” he said. “The central forecast is for the unemployment rate to trend lower over the next couple of years, reaching 4.25% at the end of 2022 and 4% at the end of 2023.”
The encouraging comments about the economy will likely mean interest rates rise sooner than that 2024 scenario previously stated by the bank.
No wonder people have been rushing to lock in fixed-rate mortgages even as those too start to come with higher rates attached.
Markets, too, will focus on the RBA’s decision to ditch its yield control curve, or the measure used to keep the yield on the benchmark bond due in April 2024 to 10 basis points, or 0.1%. That confirmation matches what traders had seen in the market for the past few days with no RBA buying to keep that yield down.
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