The Reserve Bank of Australia (RBA) yesterday left monetary settings unchanged, citing uncertainties from the Omicron strain of SARS-CoV-2, while highlighting positive signs in the labor market and broader economy.
The central bank held its key interest rate at a record-low 0.1 percent — as expected — saying that accommodative policy is still needed to push unemployment low enough to drive wages higher.
It reiterated that it would not hike until inflation is well within its 2-3 percent target.
The bank was more upbeat on the economy’s prospects, saying that Omicron was not expected to derail the recovery and predicting a return to the strong growth trajectory seen before recent lockdowns.
RBA Governor Philip Lowe said that vaccination rates against COVID-19 are high in Australia, while there has been a solid rebound in household consumption.
Lowe’s statement has economists now seeing a greater chance that the bank would scrap its A$4 billion (US$2.8 billion) a week quantitative easing (QE) program at the first meeting of next year, when it is due to be reviewed.
“There is now a clear risk the RBA announces the cessation of the bond buying program in February,” Commonwealth Bank of Australia head of Australian economics Gareth Aird said.
His base case is a taper to A$2 billion, but “it’s edging towards a lineball call between them announcing a further taper or exiting QE.”
February’s decision would be guided by three considerations: The actions of other central banks, how the Australian bond market is functioning and “most importantly, the actual and expected progress toward the goals of full employment and inflation consistent with the target,” Lowe said.
An expected acceleration in tapering by the US Federal Reserve in response to surging US inflation is also expected to be influential in Lowe’s thinking, bond traders said.
It would take time for a stronger economy to translate into increased price pressures, Lowe said in a statement, signaling that rates are to remain on hold for longer than markets expect.
“While inflation has picked up, it remains low in underlying terms,” Lowe said. “Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia.”
Markets expect a 15 basis point rate rise by the middle of next year and two subsequent quarter-point increases — with a chance of a third — over the rest of the year.
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