SYDNEY — The Reserve Bank of Australia radically revised up its forecasts for the economy on Tuesday, acknowledging that the economy is performing a lot better than expected.
However, it is still prepared to be patient until inflation is firmly entrenched within the 2%-3% target band before it raises interest rates.
The RBA also announced its exit from quantitative easing, but stressed the end of the government bond buying program didn’t signal an imminent rise in interest rates.
The RBA board kept its official cash rate unchanged at a record low of 0.10%, as expected.
“While inflation has picked up, it is too early to conclude that it is sustainably within the target band,” RBA Gov. Philip Lowe said in a statement, following the central bank’s first policy meeting since early December.
“Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target. The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve, ” he added.
The RBA’s shift to a more upbeat outlook for the economy follows news of a big fall in the unemployment rate in December, and an unexpected build-up in inflation in the fourth quarter. Core inflation is now at the upper end of the target band, and the jobless rate is approaching its lowest levels since the 1970s.
The RBA’s new central forecast is for underlying inflation to increase further in coming quarters to around 3.25%, before declining to around 2.75% over 2023, as the supply-side problems are resolved and consumption patterns normalize.
Despite some short-term impact from the Omicron variant, the RBA’s updated forecast is for the unemployment rate to fall to below 4% later in the year and to be around 3.75% at the end of 2023.
The revised guidance will go some way to resolving a huge gulf in expectations between government bond traders and the RBA around the interest rate outlook.
Money markets are betting the central bank will raise its official cash rate by May, while the RBA’s prior guidance had been suggesting a hike might be delayed until 2024. The statements today imply an interest rate increase will take place much sooner than had been anticipated.
Lowe will speak to the National Press Club on Wednesday, where he is expected to flesh out the RBA’s thinking on the economic outlook and the timing of interest rate increases.
The RBA’s decision to remain patient about tightening the monetary policy screws in Australia comes even as major central banks around the world are either already raising interest rates, or preparing to within weeks to combat the biggest inflation threat in the global economy since the 1980s.