Distributive policy

Statement by Philip Lowe, Governor: Monetary Policy Decision | Press Releases

At its meeting today, the Board decided to maintain the cash rate target at 10 basis points and the interest rate on foreign exchange settlement balances at zero percent. It has also decided to cease all purchases under the bond purchase program, with the last purchases due to take place on February 10.

The Omicron epidemic affected the economy, but it did not derail the economic recovery. The Australian economy remains resilient and spending is expected to increase as the number of cases tends to fall. The RBA’s central forecast calls for GDP growth of around 4¼% in 2022 and 2% in 2023. This outlook is supported by household and corporate balance sheets that are generally in good shape, a recovery in business investment , a large construction project pipeline and supportive macroeconomic policies. The main source of uncertainty remains the pandemic.

The labor market rebounded strongly, with the unemployment rate falling to 4.2% in December. Hours worked are estimated to have fallen significantly in January due to the Omicron outbreak, but the high number of job vacancies suggests further job gains in the months ahead. The RBA’s central forecast is for the unemployment rate to fall below 4% later in the year and to be around 3¾% by the end of 2023.

Wage growth has accelerated but, at the aggregate level, has only returned to the relatively low rates that prevailed before the pandemic. A further acceleration in wage growth is expected as the labor market tightens. This recovery should still be only gradual, even if uncertainties remain about the behavior of wages at historically low levels of unemployment.

Inflation has picked up faster than expected by the RBA, but remains lower than in many other countries. The headline CPI inflation rate is 3.5% and is affected by rising oil prices, rising prices for newly built homes and disruptions to global supply chains. In underlying terms, inflation is 2.6%. Under the central forecast, core inflation is expected to rise further in the coming quarters to around 3¼%, before falling back to around 2¾% in 2023 as supply issues are resolved and patterns of consumption will normalize. A source of uncertainty is the persistence of disruptions in supply chains and distribution networks and their continued effects on prices. It is also unclear how consumption patterns will evolve and how this will affect the balance of supply and demand, and therefore prices.

Financial conditions in Australia remain very accommodative. Together, the RBA’s bond-buying programme, funding provided under the Term Funding Facility and low interest rates are providing significant support to the Australian economy as it recovers. effects of the pandemic. The Australian dollar exchange rate is hovering around its lows of last year. House prices rose sharply, although the rate of increase slowed in some cities. With interest rates at historic lows, it is important that lending standards are maintained and that borrowers have sufficient reserves.

The decision to end purchases under the bond-buying program follows a review of the actions of other central banks, the functioning of the Australian bond market and progress towards full employment and consistent inflation targets. to the goal. Many other central banks have ended or will soon end their bond buying programs. More importantly, faster than expected progress has been made towards the RBA goals and further progress is likely. Under these circumstances, the Board felt that the time had come to end the bond purchase program. Since the start of the pandemic, the RBA’s balance sheet has more than tripled to around $640 billion, with the expansion providing continued support to the economy. The Board will consider the issue of reinvestment of proceeds from future bond maturities at its May meeting.

The Board is committed to maintaining very supportive monetary conditions to achieve its objectives of returning to full employment in Australia and inflation on target. The cessation of purchases under the bond purchase program does not imply a short-term increase in interest rates. As the Commission has previously indicated, it will not raise the cash rate until real inflation is durably within the target range of 2-3%. Although inflation has picked up, it is too early to conclude that it is permanently within the target range. There are uncertainties about the persistence of the inflation recovery as supply issues are resolved. Wage growth also remains modest and it will likely take some time before overall wage growth reaches a rate consistent with inflation sustainably at the target level. The Council stands ready to be patient as it monitors the development of the various factors affecting inflation in Australia.