RBA’s Lowe Flags Rate Rise Possibility This Year for First Time

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Australia's central bank chief Philip Lowe signaled for the first time that interest rates could rise this year if faster wages growth returns inflation sustainably to the 2-3% target.

That is “a plausible scenario” depending on how events unfold, but there are plenty of other scenarios as well, Lowe said in comments that increased his room for maneuver over the coming months.

“There are a lot of uncertainties both on the supply side and the labor market dynamics and because inflation's not that high at the moment we can wait to see how those uncertainties resolve,” Lowe said in response to a question after a speech in Sydney Wednesday.

“If they resolve in one way, then we'll be raising rates, if they resolve in another way, it's still quite plausible that the first increase in interest rates is a year or longer away.”

Lowe used his first speech of the year to keep his monetary policy options open by stepping back from the view that rate hikes were still a long way off while also underlining the Reserve Bank's scope for remaining patient.

The governor said Australia didn't face the types of price pressures that are forcing counterparts from Washington to Wellington to prepare or already begin hiking. 

Read More: Australia Holds to Dovish Stance After Scrapping QE Program 

The RBA wrongfooted markets Tuesday when it maintained a dovish rate stance despite scrapping a 15-month quantitative easing program. The ending of QE “does not represent a tightening of monetary policy,” the governor said in his prepared remarks. 

“We don't want to see inflation too low or too high,” Lowe said Wednesday. “We will do what is necessary to maintain low and stable inflation, which is important not only in its own right but also as a precondition for a sustained period of full employment.”

RBA's Dovish Outlook Doubted as Yields Hold Gains After Speech

Traders had responded to Tuesday's rate signal by pushing back bets for liftoff to June from May, while economists stuck to their August calls in the expectation that a tight labor market will quickly generate pay pressure. 

The RBA has kept the cash rate at a record-low 0.1% since November 2020, and had previously given guidance that conditions for a hike weren't expected to be met until 2024. 

The governor said Wednesday that the RBA had never said rates wouldn't go up until 2024.

The RBA is now forecasting the quarterly Wage Price Index to rise 2.75% this year and 3% in 2023. 

“Based on the evidence we have, it is too early to conclude that inflation is sustainably in the target range,” Lowe said, referring to the bank's 2-3% band.

The central bank has struggled to persuade investors it will keep rates unchanged against the backdrop of volatility generated by the pandemic, in which inflation has rapidly superseded economic stimulus as the key challenge for global central banks.

“The board is prepared to be patient as it monitors the evolution of the various factors affecting inflation in Australia,” Lowe said.

His difficulty in holding to his dovish line is highlighted by the RBA's own forecasts showing the jobless rate falling below 4%, generally seen as full employment, and core inflation pushing higher. 

“We are closer to full employment and achieving the inflation target than we had anticipated,” the governor said.

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