RBA hold rates but is on alert

The Reserve Bank of Australia has indicated it will be assessing inflation and wage figures in coming months before raising interest rates.

The RBA board left the cash rate at a record low 0.1 per cent last week’s monthly board meeting, as widely expected.

RBA governor Philip Lowe said inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at the two to three per cent target.

“Over coming months, important additional evidence will be available to the board on both inflation and the evolution of labour costs,” Dr Lowe said in a post-meeting statement.

“The board will assess this and other incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with the target.”

The Australian Bureau of Statistics will release the consumer price index for the March quarter on 27 April, while its wage price index for the same period will be issued on May 18.

Dr Lowe has previously stated the board will be “patient” in lifting the cash rate – a word dropped in the latest statement – but he has also said an increase this year was plausible.

He noted the annual inflation rate is already running at 3.5 per cent and the more policy-sensitive underlying measure is at 2.6 per cent.
“Higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters, with an updated set of forecasts to be published in May,” Dr Lowe said.

“The main sources of uncertainty relate to the speed of resolution of the various supply-side issues, developments in global energy markets and the evolution of overall labour costs.”

He also said while wages growth has picked up, at the aggregate level it is only around the relatively low rates prevailing before the pandemic.
However, he said there are some areas where larger wage increases are occurring.

“Given the tightness of the labour market, a further pick-up in aggregate wages growth and broader measures of labour costs is in prospect,” he said.

“This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of labour costs at historically low levels of unemployment.”

Dr Lowe noted the unemployment rate is already at four per cent, and that high levels of job vacancies and advertisements point to continuing strong growth in employment over the months ahead.

The RBA’s central forecast is for the unemployment rate to fall to below four per cent this year and to remain below four per cent next year, levels not seen since the early 1970s.