RBA Happy To Discount Omicron

The RBA left its broader monetary policy settings unchanged at the end of today’s monetary policy meeting, matching unanimous expectations.

• The lack of worry re: the omicron COVID strain provided the most notable passage when it came to statement, with the Bank noting that “the emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery. The economy is expected to return to its pre-Delta path in the first half of 2022.” This provided a positive tinge to the statement, lending incremental support to the AUD in FX trade & providing modest pressure for Australia fixed income assets.
• The Bank’s forward guidance was maintained, in that it “is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target. While inflation has picked up, it remains low in underlying terms. Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the Board is prepared to be patient.”
• It reaffirmed its view that “a further, but only gradual, pick-up in underlying inflation is expected. The central forecast is for underlying inflation to reach 2½ per cent over 2023.” Uncertainties on that front continue to stem from wage price dynamics in the current environment, which is a well-documented concept.
• The Bank also confirmed that it will reconsider bond purchases at its next meeting, in February. It noted that “by mid February, the RBA will hold a total of $350 billion of bonds issued by the Australian Government and the states and territories, with these holdings providing significant support to the economy. In reaching its decision in February, the Board will be guided by the same three considerations that it has used from the outset of the program: the actions of other central banks; how the Australian bond market is functioning; and, most importantly, the actual and expected progress towards the goals of full employment and inflation consistent with the target.”