In its last sitting for 2021, the RBA held its cool, maintaining rates at a record low 0.1 per cent for the 12th consecutive month, but in a sign of change the central bank removed all reference to the year 2024, after playing its “lower for longer” game for many months.
Instead, on Tuesday, RBA boss Dr Philip Lowe said: “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This 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 and the board is prepared to be patient”.
Patience is the name of the game
Commenting on Dr Lowe’s only real deviation from the path he and the bank have taken for months, AMP’s Shane Oliver noted the bank’s pivot towards “the latest data” and away from long-term projections.
“The removal from the final key paragraph on the cash rate of a reference that was in its November statement to it expecting ‘underlying inflation to be no higher than 2.5 per cent at the end of 2023’ serves to emphasise that the timing of the first-rate hike is dependent on the conditions for it being met rather than a particular year,” Mr Oliver said.
“In other words, the RBA will be data dependent, not calendar dependent, in deciding when to raise rates,” he noted.
In this regard, Mr Oliver’s view remains that the economy and the jobs market will be stronger than the RBA is expecting through next year pushing the unemployment rate down to 4 per cent and wages growth up to the 3 per cent or greater pace that it’s looking for.
“We see the RBA’s conditions for a rate hike being met by late next year and so continue to see the first hike coming in November next year taking the cash rate to 0.25 per cent followed by another hike to 0.5 per cent in December next year.
“The main threat to this could come from a big set back to the recovery from the Omicron variant but if its more transmissible but only results in mild illness as some reports suggest then this would be unlikely,” Mr Oliver explained.
In the interim, AMP is confident the RBA will further taper its bond buying from $4 billion a week to $2 billion a week at its review in February, before scrapping the program in May, encouraged by similar action by the Fed and other central banks.
