RBA May Highlight Inflation, Virus Risks in Rate-Hold Call

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Australia's central bank is likely to highlight the interval between building economic momentum and faster price gains as well as renewed risks from a new coronavirus variant in its final meeting of the year.

All 27 economists surveyed see the Reserve Bank holding its cash rate at a record-low 0.1% on Tuesday. On the policy outlook, markets see rate liftoff in May, well ahead of Governor Philip Lowe's expectation of a first hike around 2024, underlining a growing disconnect between investors and policy makers. 

Data released Monday underlined the RBA's conundrum: a closely-watched gauge of Australian job vacancies surged in November to be a record 44.2% above its pre-pandemic level, while a measure of inflation showed price pressures remained subdued.

“We expect the RBA to remain patient,” said Scott Solomon, a bond portfolio manager for T.Rowe Price. “The omicron news is just the latest example of how hard this environment is on policy makers. Every time there appears to be significant clearing ahead, a new problem pops up making it difficult to pivot.” 

As a result, the RBA is seen maintaining a cautious stance despite recent data showing increasing strength in the A$2.1 trillion ($1.5 trillion) economy. Last week's GDP report showed fallout from extended lockdowns on Australia's east coast wasn't as bad as feared, house prices are still climbing and card spending figures from banks suggest consumption has bounced back sharply.

But Lowe expects it will take time for improving growth to translate into faster price gains in the economy. He's using ultra-low rates to try to drive unemployment down to 4% -- from 5.2% at present -- to spur wage rises and help return inflation “sustainably” to the mid-point of the RBA's 2-3% target. 

Australia Rate Hikes in 2022 Are a Real Possibility, Auld Says

Traders will be looking at tomorrow's rate statement for any steer on the RBA's review of its bond-buying program Feb. 1, the first meeting of 2022. 

The review is widely expected to see the bank scale back the weekly pace of purchases from the current A$4 billion ($2.8 billion) amid an improved outlook, supply constraints in the local bond market and signs the Federal Reserve will quicken its own taper.

Fed's Hawkish Shift Could See RBA End QE in February

Given the no-change expectation for the RBA and uncertainty over the new virus strain, it may turn out there's more to be learned offshore, according to Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC.

“Three other central bank meetings in the coming weeks will be more interesting should omicron developments deteriorate,” she said, citing the Fed, Bank of England and European Central Bank all convening the week after the RBA against the backdrop of a hawkish tilt by the U.S.'s Jerome Powell.

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