MNI STATE OF PLAY: RBA Stays Firm On Cash Rate View, Drops QE

The Reserve Bank of Australia is maintaining its dovish stance relative to other developed market central banks and declined to update its interest rate guidance despite recent bullish data on employment and more importantly inflation.

At Tuesday's first board meeting for 2022, the RBA did however announce an end to its bond buying programme, which will continue at the rate of AUD4 billion per week and end on Feb 10, see: MNI BRIEF: RBA Patiently Waits On Inflation As QE Ends.

Interest rates were unchanged, as expected, at the record low of 0.10% but the bank declined to bring forward its guidance on an interest rate hike despite trimmed mean inflation – its preferred measure – hitting 2.6% in the last quarter of 2021, well within the RBA’s 2% to 3% target range.

INFLATION UNCERTAIN

The RBA's explanation was that it is “too early” to conclude that inflation is sustainably within the target band, and there was no update on the most recent comments on a rate rise which it has said is possible in late 2023 or even as late as 2024, see: MNI STATE OF PLAY: RBA Rate Hike Timing View Under The Scanner.

The RBA said it expects underlying inflation to reach 3.25% in coming quarters before falling to 2.75% over 2023 as supply chain issues ease.

“There are uncertainties about how persistent the pick-up in inflation will be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target,” the RBA statement said.

“Wages growth has picked up but, at the aggregate level, has only returned to the relatively low rates prevailing before the pandemic.”

Wages rose by an annualised 2.2% in the third quarter of 2021 and Q4 data is due on Feb. 23. The RBA expects wages growth to be gradual as the labour market, where unemployment is at 4.2%, continues to tighten, see: MNI INTERVIEW: Australia Wage Growth Returning to Normal: ABS.

IN LINE WITH OTHER CENTRAL BANKS

On the bond buying programme, the RBA said the decision to end the programme followed a review of the actions of other central banks, the functioning of Australia’s bond market and “faster than expected” progress towards the goals of full employment and the inflation target.

The programme had tripled the RBA balance sheet to around AUD640 billion, and the bank would consider the issue what to do with future bond maturities at its meeting in May.