Key points
- RBA interest rates to remain unchanged
- ASX 200 gains on announcement
- Inflation hasn't yet proven to be structural
The Reserve Bank of Australia (RBA) has opted to keep the official interest rate at the current historic low of 0.10%.
The S&P/ASX 200 Index (ASX: XJO) gained more than 0.6% in the handful of minutes following the RBA's interest rate decision at 2.30pm AEDT.
The ASX 200 is currently up 0.7% for the day.
What did the RBA governor report?
In his statement this afternoon, RBA governor Philip Lowe said that while the interest rate will remain unchanged, the central bank will stop its quantitative easing (QE) program. The RBA's final bond purchase under the program will be on 10 February.
According to Lowe, "The Australian economy remains resilient and spending is expected to pick up as case numbers trend lower."
Lowe said that the Omicron variant has impacted the Aussie economy but not derailed it. He cited the pandemic as the biggest area of uncertainty looking ahead.
The RBA is forecasting GDP to grow in the range of 4.25% in 2022 and slow to 2% growth in 2023. The banks said that household and businesses are broadly financially in good shape and it sees "an upswing in business investment, a large pipeline of construction work and supportive macroeconomic policy settings".
Unemployment slides
As for the labour market, unemployment fell to 4.2% in December. Lowe said that there were still a high number of job vacancies which "suggest further gains in employment over the months ahead".
The RBA is forecasting that unemployment will dip below 4% later in 2022 and fall to around 3.75% by the end of 2023.
The higher employment figures haven't fully filtered through to wages yet. Wage growth was reported to be similar to what we saw prior to the onset of the pandemic. Lowe said the bank expects wages to increase gradually, but noted "uncertainty about the behaviour of wages at historically low levels of unemployment".
Inflation ticking higher than RBA expected
Inflation increased faster than the RBA had been forecasting.
The headline CPI inflation rate of 3.5% is being driven by increased fuel prices, supply chain disruptions and higher new dwelling costs.
Underlying inflation, which removes volatile goods like petrol, was reported at 2.6%. The RBA expects underlying inflation will increase to around 3.25% over the coming quarters before falling back to 2.75% in 2023. It noted that supply chain disruptions remain the biggest uncertainty in that forecast.
Looking ahead
Looking ahead at the RBA's interest rate intentions, Lowe said:
The Board 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…
As the Board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target band…
The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.
