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In the wake of the budget, the Reserve Bank rate stays at 0.1 per cent.
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RBA leaves rates on hold
05 April 2022
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The RBA has held interest rates steady while acknowledging “sharply” increasing inflation in many parts of the world and a range of problems from supply-chain issues to Russia’s invasion of Ukraine.
Governor Philip Lowe said as a consequence, bond yields had already risen and “expectations of future policy interest rates have increased”.
He painted a rosy picture of the Australian economy, which was showing post-pandemic resilience he said, while the labour market was strong.
“Household and business balance sheets are in generally good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed,” he said.
“Macro-economic policy settings also remain supportive of growth and national income is being boosted by higher commodity prices.”
But he said rising prices were putting pressure on household budgets and the floods were causing hardship.
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“Inflation has increased in Australia, but it remains lower than in many other countries; in underlying terms, inflation is 2.6 per cent and in headline terms it is 3.5 per cent,” he said.
“Higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters.
“The board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates. Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target.”
In coming months, the board would examine evidence on both inflation and labour costs “as it sets policy to support full employment in Australia and inflation outcomes consistent with the target”.
AMP Capital chief economist Shane Oliver said the conditions for a rate hike will be in place by June.
“The RBA’s objective of full employment has been reached, wages growth is picking up and inflation is pushing well above target with a rising risk that inflation expectations will start to rise in which case it will become self-feeding,” said Mr Oliver.
Economist Saul Eslake predicted that the first rate increase will come in August because the RBA was not satisfied that underlying inflation is “sustainably” within its 2-3 per cent target band.
“Moreover, the principal criterion that they’ve stipulated for becoming satisfied that underlying inflation is sustainably within their target band, namely, wage inflation of at least 3 per cent, is still some way from being met,” Mr Eslake said.
“So, I remain of the view that the first increase will come after the June quarter CPI – which means the August meeting. If that means that the Australian dollar weakens against the US dollar because the Fed may have raised its fund rate by another 50-75 basis points by then, I think the RBA will welcome that.”
University of Western Australia Professor Jakob Madsen said the supply shocks had pushed inflation up.
“However, I believe that the core inflation will start increasing as the inflation builds into expectations and wage aspirations given the overheated labour market within certain sectors,” said Mr Madsen.
“This will bring the core inflation beyond the 2-3 per cent RBA inflation target and spur an interest rate increase.”
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