MNI STATE OF PLAY: RBA Rate Hike Timing View Under The Scanner

Markets expect new guidance on benchmark Reserve Bank of Australia interest rates this week as jobs and inflation data roared ahead of a highly-anticipated meeting that will also decide on the future of the bond buying programme.

The RBA's official interest rate is currently a record low 0.10%, with the most recent forecast for a rate hike set for late 2023 or even 2024, a view it stuck with in the December review with January traditionally a skipped month for policy reviews, (see: MNI STATE OF PLAY: RBA Unfazed By Omicron Or Inflation.)

But bets are growing the RBA could make its first interest rate hike since 2010 later this year with unemployment at 4.2% and CPI inflation at 3.5% and trimmed mean inflation, the RBA’s preferred measure, at 2.6%, well within the 2% to 3% target band.

Over the last two years the bank has continued to say that the conditions for an interest rate rise are full employment - understood to be in the low 4% range - and inflation within its mandated range.

BOND BUYING

In addition to forward guidance on rates, the RBA is scheduled to decide on Tuesday on the future of its bond buying programme. The bank (will either) end the program, continue purchasing bonds at a lesser rate or continue the program at AUD4 billion per week.

The RBA has been purchasing AUD4 billion in government bonds weekly since September, when it abandoned its yield targeting on three-year bonds maturing in April 2024 and decreased purchases from AUD5 billion per week.

The central bank now holds around 35% of government debt on issue. MNI understands it is likely to hold the April 2024 bonds through to maturity, but no announcement has been made on unwinding its other holdings.

WAGE DATA, OMICRON

The third factor in the RBA’s outlook is (wage growth).

The (latest data) is for the third quarter and is seen as lagging current conditions in the economy, and fourth quarter data will not be released until Feb. 23.

The government and the RBA are closely watching the economic impact of the Omicron virus variant, which hit the national economy in December. The government of the most populous state, New South Wales, announced a further AUD1 billion assistance package for small business at the weekend.

More on the RBA’s outlook will be revealed when Governor Philip Lowe addresses the National Press Club on Wednesday, and when the bank releases its updated Statement on Monetary Policy on Friday.