Inflation has entered the Reserve Bank’s target range, but despite fears that the “transitory” definition slapped on current trends may not be on point, the RBA could hold off lifting rates until 2024.
In his policy speech on Tuesday, RBA governor Philip Lowe noted that while recent inflation data indicates Australia is making “better than expected progress towards our inflation objective”, “we still have a long way to go”.
“Underlying inflation has only just returned to the target range for the first time in six years and is only just above the bottom of that target range. In terms of the real economy, the recovery is back on track following the interruption caused by the Delta outbreak,” Mr Lowe said.
“We’re expecting the recovery to continue and the unemployment rate to fall lower reaching 4 per cent at the end of 2023.”
Noting the transitory nature of current trends in inflation, Mr Lowe said evidence suggests “a period of contractionary monetary policy will not be required to return inflation to targets”.
Discussing some of the reasons why inflation has risen recently, Mr Lowe pointed to an “unprecedented switch in consumption patterns” as a result of the pandemic.
“There was a perfect storm of sorts: very strong demand for goods combined with a hit to productive capacity. The result was a sharp increase in shipping costs around the world, a fall in inventories, increased delivery times and large rises in the prices of many goods,” governor Lowe said.
“A similar story has played out in many commodity and energy markets,” he noted.
Looking ahead, Mr Lowe said the key question will be whether consumption patterns will normalise over time, and if so, what effect this will have on prices.
“Although there is some uncertainty, it is likely that inflation from these sources will moderate over the next 18 months as demand rebalances towards services and the supply of goods adjusts,” the governor said.
Noting that while over the past 50 years, an inflation rate in the twos and an unemployment rate in the fours would have been considered very good outcomes, “we are in this place only because of extraordinary policy support”.
“Over time, as a country, we will need to refocus on the underlying drivers of growth in the economy and jobs.”
He reiterated the central bank’s intention to maintain the cash rate until inflation is sustainably in the target range – well within the 2-3 per cent – which is projected to occur at the end of 2023.
The governor explained that the RBA would be using wages growth as one of the guideposts in assessing progress towards its goal.
“Unless labour productivity growth is very weak, it is likely that wages will need to be growing at 3 point something per cent to sustain inflation around the middle of the target band,” the governor said.
“As we get closer to that goal, you could expect us to provide further guidance, including our projections for inflation.”
As such, he said, it is still plausible that the first increase in the cash rate will not be before 2024.
The governor did, however, concede that an earlier rate rise could be warranted if faster-than-expected progress continues to be made towards achieving the inflation target.
But, going against market forecast, he reiterated that the latest data does not warrant an increase in the cash rate in 2022, adding that the board is opting for patience.
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.