RBA’s April 2022 decision

The RBA opted to hold the official cash rate at 0.1% at today’s monthly meeting, which came as little surprise as Australia waits for an election to be called.

However, the central bank boss again flagged that changing economic conditions could see an interest rate hike in the near future.

“Inflation has increased sharply in many parts of the world. Ongoing supply-side problems, Russia’s invasion of Ukraine and strong demand as economies recover from the pandemic are all contributing to the upward pressure on prices,” RBA governor Philip Lowe said in his statement. “In response, bond yields have risen and expectations of future policy interest rates have increased.”

Lowe noted that the Australian economy is continuing to perform well, with household and business balance sheets in good shape, an increase in business investment and a large amount of construction work in the pipeline, while national income is being boosted by higher commodity prices.

But he did concede that rising prices and hardships from natural disasters such as the recent floods are putting pressure on household budgets.

Unemployment falls again

Another improvement to the unemployment rate had it sitting at 4% at the end of February, while underemployment was also at a new low.

“The RBA’s central forecast is for the unemployment rate to fall below 4% this year and remain below 4% next year,” Lowe said. “Wages growth has picked up, but, at the aggregate level, is only around the relatively low rates prevailing before the pandemic.”

On inflation

Lowe noted that while inflation has increased in Australia, it is at 2.6% in underlying terms, despite being 3.5% in headline terms.

This meant we were lower in inflation terms than many other countries, but “higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters, with an updated set of forecasts to be published in May”.

So will the RBA raise rates?

Lowe reaffirmed that RBA policy was to wait for evidence that inflation is sustainably within the 2 to 3% target range before increasing 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,” he said, adding that the board would continue to monitor various conditions in coming months.

And the observers say?

A Finder survey of 34 economists and financial experts found that while none were expecting a rate rise today, a significant 88 per cent expected the RBA to hike this year, with some forecasting the first movement as early as June.

AMP economist Shane Oliver said the conditions were right for a rate rise in the coming months.

“The RBA’s objective of full employment has been reached,” Mr Oliver said.

“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, and the Budget will add in more stimulus this year. So the conditions for a rate hike will be in place by June.”

But Leanne Pilkington of Laing+Simmons said there was “a case to be made” for the RBA to keep rates on hold “given the delicate cost of living factors and global uncertainty.”

Aussies ready to tighten belts

 A separate survey by Canstar found that 56% of Australians were worried about being able to pay their bills if the RBA did raise rates in an environment of skyrocketing costs. Many of the survey respondents said their mortgages were their biggest concern, ahead of rising rents and petrol prices.

Canstar’s Steve Mickenbecker said a cash rate rise would make the situation much worse for a lot of Australians.

Costs keep rising for households with petrol prices reaching an eight-year high and supermarket shoppers reporting higher grocery bills, but the sting is about to get worse for some,” he said.

“Anyone with a mortgage will likely feel financial pain when the Reserve Bank raises the cash rate this year as predicted by some of the major banks.”

 

 

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Statement by Philip Lowe, Governor: Monetary Policy Decision – 5 April 2022