Easy does it until February. Dr Michael Malakellis, KPMG Senior Economist, responds to the RBA’s monthly statement
The only significant difference in the RBA Governor’s statement today from last months is to flag to the market that the Board will be considering the bond purchase program at its February meeting. Today’s guidance appears to be preparing the market for the winding back of the bond purchase program that is likely to be announced at the first meeting of 2022. Interest rates will stay on hold.
The RBA’s outlook is unchanged. It continues to view inflation as well contained and driven by temporary factors. The focus continues to be on wage growth, which at the aggregate level continues to be modest despite pockets of tightness in some parts of the labour market.
The RBA’s overall guidance remains on emphasising a commitment to maintaining highly supportive monetary conditions. It has maintained the guidance that cash rates will not be increased until inflation is in the 2 percent to 3 percent range. The RBA is projecting that underlying inflation will reach 2.5 percent in 2023.
The Omicron variant of COVID has made bond markets a bit more cautious with bond yields retreating from recent highs. The market continues to price in rate hikes sooner than the RBA is suggesting.
Assuming the Omicron variant does not instigate a further round of lockdowns and supply disruptions, we anticipate the RBA will come under increasing pressure to raise rates in the latter part of next year or early 2023. Even if an increase in cash rates is delayed to later in 2023, we expect the costs of borrowing to rise gradually as retail banks lift lending rates in response to higher wholesale market lending costs.
The Australian economy continues to surprise on the upside and the course the RBA is steering is not easy. Monetary policy is a blunt instrument and while the maintained focus of the RBA on CPI inflation and full employment is understandable the distributional consequences of current policy settings cannot be ignored.
Asset price inflation and uneven growth in wages and activity across the economy can leave long-lasting impacts on the economy and on the distribution of wealth.