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Key points
- Yesterday, the Reserve Bank of Australia (RBA) kept interest rates on hold
- The current cash rate of 0.10% is the lowest in history
- What could force the RBA to raise rates sooner than it is predicting?
The talk of the ASX town so far this week has more or less centred on the Reserve Bank of Australia (RBA). Yesterday, the RBA met for its monthly consideration of monetary policy. As most investors expected, the RBA kept the official cash rate on hold at its historic low of 0.10%. However, it did announce the end of its quantitative easing (QE) bond buying programs that have been ongoing since the outbreak of the pandemic in 2020.
Yesterday's meeting was a highly watched one for a number of reasons. Since the RBA last gathered in December, the global inflation outlook has shifted considerably. We've seen decades-high inflation over in the United States. And Australia's own inflation numbers have recently come in at far higher rates than what the RBA was predicting only a few months ago.
For most of last year, the RBA was telling Australians not to expect any increases in interest rates until 2024. Given that inflation is now inching closer to the upper end of the RBA's 2-3% target band, many investors were expecting the RBA to move the goalposts on this prediction.
RBA governor Lowe addresses the nation
As it happens, the Governor of the Reserve Bank, Dr Philip Lowe addressed the National Press Club today after yesterday's meeting. His remarks shine a light on where the RBA's thinking now stands. So let's check out what we now know about interest rates, and what we still don't know.
So Dr Lowe has brought forward the RBA's expectations for when interest rates will rise. Lowe confirmed that the RBA is now pricing in a wages growth rate of 3% over 2023, which, going off some of his previous comments, would suggest that the RBA would raise rates in 2023, and not 2024 as previously flagged.
Even though underlying inflation is today at 2.6% (with CPI inflation at 3.5%), it seems the RBA is still waiting on the wage growth index to rise further. It's currently at 2.25. Here's some of what Lowe said on these matters today:
As I have said on previous occasions, the Board will not increase the cash rate until inflation is sustainably within the 2 to 3 per cent range… aggregate wages growth in Australia remains low and is at a rate that is unlikely to be consistent with inflation being sustained around the midpoint of the target range…
While inflation has picked up in Australia, it remains substantially lower than [other advanced economies] and it has not been accompanied by strong wages growth… These are important differences…
Based on the evidence we have, it is too early to conclude that inflation is sustainably in the target range… aggregate wages growth in Australia remains low and is at a rate that is unlikely to be consistent with inflation being sustained…
Inflation might be picking up, but don't expect rates to follow (yet)
So it seems that the RBA is sticking to its guns for the most part, albeit with the implicit suggestion that we might see rate hikes in 2023 rather than 2024. But it all seems to rest on wages growth, rather than headline inflation. So keep an eye on that number if you want to attempt to predict what the RBA might do next.
But these things can change as fast as the weather, so keep that in mind as well.
