RBA Maps Route to Faster Inflation, Stays Patient on Rates

(Bloomberg) -- Australia's central bank upgraded its inflation and employment outlook, while still seeing wage pressures building only gradually, a key reason Governor Philip Lowe is prepared to be patient on raising interest rates.

The Reserve Bank now sees core inflation breaching 3% for the first time since 2010, before settling around 2.75% through to mid-2024, its quarterly Statement on Monetary Policy showed Friday. Still, the wage price index is only expected to advance to 2.75% this year, then edge up to 3% over 2023.

Reserve Bank of Australia Detailed Economic Forecasts (Table)

There are “uncertainties about how labor supply might evolve, related to the reopening of the borders and people's availability to work,” the RBA said. “This will have a bearing on wages growth, which in aggregate has only just returned to the low rates prevailing before the pandemic.”

Economists appear skeptical of Lowe's assessment that a jobless rate below 4% will take time to flow through to faster wages growth and see rates rising in just a few months. The RBA acknowledges it has made “material” progress toward its goals, which allowed it to end a bond buying program this month.

But the bank reiterated that it was too early to conclude inflation is sustainably in its target range and as a result the board is prepared to be patient. 

Lowe's benign rate stance contrasts with counterparts spanning from Wellington to Washington, who have either already tightened in response to intensifying inflation pressures or have signaled plans to do so. 

The Bank of England this week raised its key rate in a bid to contain the fastest inflation in three decades, and European Central Bank President Christine Lagarde is no longer ruling out a hike this year.

“The RBA is building in some optionality on monetary policy should the wage price index not move to 3%-plus, but labor capacity continues to ease and costs rise,” said Royal Bank of Canada's Su-lin Ong. “For now, it is prepared to be patient amid multiple uncertainties, but it is looking increasingly like an outlier amongst its peers with dwindling reasons.”

Australia's Lowe Is Odd-Dove-Out Among Hawkish Central Bankers

Still, the central bank left the door ajar to earlier rate hikes if needed as it repeated today that it doesn't want to see consumer prices too high or too low and will do what's necessary to maintain “low and stable” inflation.

Indeed, the governor acknowledged for the first time following a speech on Wednesday that a rate hike later this year is a “plausible scenario.”

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