MNI STATE OF PLAY: Dovish RBA Waits On Wages Growth

The Reserve Bank of Australian is maintaining its dovish policy outlook with wages growth now the key to driving official interest rates up from their record low of 0.10%.

The RBA Board On Tuesday, as expected, left rates on hold, with a May review scheduled on how to unwind the central bank’s AUD350 billion portfolio of bonds purchased under its programme of quantitative easing which ended in February, see: MNI BRIEF: RBA Says Inflation Lags On Wages As Rates On Hold.

UNCONVINCED

Although trimmed mean inflation is at 2.6%, and in the middle of the RBA’s 2% to 3% range for the first time in around seven years, the RBA is still unconvinced about the sustainability of price gains given that wages growth remains at a sluggish 2.3%.

“It is likely to be some time yet before growth labour costs are at a rate consistent with inflation being sustainably at target,” today’s RBA statement said.

“While inflation has picked up, it is too early to conclude that it is sustainably within the target range.”

PLENTY OF STEAM

Other economic indicators are bullish. Employment is at a 14-year-low of 4.2% and the RBA is forecasting it will fall below 4% later in the year.

Growth data will be released for the fourth quarter on Wednesday and is expected to show the economy expanding at 3% after turning negative amid the pandemic restrictions in the third quarter.

The forecast for inflation is a short-term increase to 3.25% before falling to around 2.75% over 2023 as supply-chain issues are resolved.

Despite market expectations of one, or more, rate hikes this year the RBA is among the most dovish of developed world central banks. Tuesday's statement however did not repeat the longstanding view that rates were unlikely to rise until 2023 or even 2024.