MNI STATE OF PLAY: Omicron Likely To Keep RBA Dovish

Fresh uncertainty on the impact of the Omicron virus variant is likely to keep the Reserve Bank of Australia’s outlook on monetary policy dovish as the central bank goes into its final meeting of the year.

The RBA board meets on Tuesday and although recent economic indicators, such as the better than expected 1.9% third quarter GDP growth and strong October retail sales, are indicating a strong economic rebound the bank is likely to continue its cautious approach to policy, see: MNI INSIGHT: Retail Sales Point To Strong Australia Q4 GDP.

There is no expectation that the RBA will change official interest rates from the record low of 0.10% and its only other current policy lever, the bond buying program, is scheduled to continue at the rate of AUD4 billion a week until a review in February.

CHANGE OF LANGUAGE

The RBA’s views on the Omicron variant will be closely watched, as will any change in its language on an interest rate rise which the bank now says is possible either in late 2023 or 2024, depending on the progress of inflation.

Trimmed mean inflation for the third quarter was at 2.1%, and inside the RBA’s 2% to 3% target range for the first time in more than five years, but the RBA is forecasting a sluggish increase to 2.5% by the end of 2023.

WAGE KEY

Growth is expected to rebound sharply in the fourth quarter of 2021, but wage growth – which the RBA sees as the key to driving inflation sustainably into its target range – is still low at an annualized 2.2%.

October unemployment was at 5.2%, and the bank has said it believes it should be in the low 4% range to have an impact on wages growth.

The RBA meeting may also offer some commentary on the future of the bond buying programme with the bank perceived to be under some pressure to stop the program in February as other central banks taper their own purchases.