RBA Highlights Ukraine War Risks to Outlook as Key Rate Held

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The Reserve Bank of Australia said it will remain “patient” as it assesses risks stemming from Russia's invasion of Ukraine and the resulting jolt to energy prices.

The central bank -- as expected -- kept its cash rate at a record low 0.1% on Tuesday, Governor Philip Lowe said in a post-meeting statement. He reiterated that while inflation has picked up, it's “too early to conclude” that it's sustainably within the RBA's 2-3% target.

“The war in Ukraine is a major new source of uncertainty,” Lowe said. “Inflation in parts of the world has increased sharply due to large increases in energy prices and disruptions to supply chains at a time of strong demand.”

The Australian dollar declined briefly as traders read the language in the decision as relatively dovish but later pared losses. The yield on three-year bonds was flat at 1.54% while the 10-year yield edged up to 2.19%.

Lowe's take on Ukraine and his reiteration that wages and inflation remain below par underscore his dovish position. Unlike developed world peers who are preparing to raise rates or already doing so to rein in consumer prices, the RBA chief reckons he has time on his side to monitor developments.

What Bloomberg Economics Says

“Muted wages growth supports the RBA's case for standing pat, even if energy price rises triggered by the Ukraine conflict boost inflationary pressures temporarily. Price gains are likely to fade in 2H 2022, and wage gains are a long way from reaching the pace needed to underpin sustained inflation -- and justify rate hikes.”
-- James McIntyre, Bloomberg Economist. Read full note here

In response to the Russia-Ukraine crisis, financial markets have pared back the chances of an RBA rate rise in May, but are pricing in two hikes in six months' time. Most economists see rate liftoff in August.

“Our base case scenario remains the first rate hike occurs in June but if there is a further escalation in the Russia‑Ukraine situation, August 2022 would then be the next most likely option,” said Belinda Allen, a senior economist at Commonwealth Bank of Australia.

“Between now and June the RBA will receive one further CPI and wage price index print. We expect both numbers to show a further acceleration.”

Lowe cites weak wages growth to argue that a recent acceleration in inflation is unlikely to prove sustainable, meaning there's no rush to raise rates.

His dovish commentary comes against a backdrop of a strong economy, which likely expanded 3.4% in the final three months of 2021, following a contraction in the third quarter due to virus lockdowns.

Lowe's stance is out of step with Federal Reserve policy makers, who have played down the prospect of delaying rate liftoff this month due to Ukraine.

European Central Bank President Christine Lagarde is more guarded, saying it's too early to judge the overall economic impact of the crisis, though persistent uncertainty will likely drag on investment and consumption.

But Lowe is united with his global policy counterparts in viewing the Ukraine war as likely to exacerbate supply-chain disruptions, further fanning inflation that is already surging in economies from the U.S. to New Zealand.

Australia has limited trade links with Russia and Ukraine, at just 0.2% of total exports and imports in 2021, with services trade “negligible,” according to economists at St George Bank. They say there could be some short-term uptick in prices of wheat and natural gas.