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  • Writer's pictureCrest Economics

Lowe sits tight on Interest Rates until wages to take off- February 2022

Amidst a week of skyrocketing inflation and plummeting financial markets, the Reserve Bank of Australia has determined there is no urgency to raise interest rates. Whilst no changes are expected to move forward with the cash rate of 0.1%, the bank’s program of pumping money into the economy with bond purchases may reach a drop-off.

The RBA is forecasting unemployment to fall below 4% for the first time since the 1970s and have strayed away from financial market expectations and other central bank decisions. RBA board kept the official cash rate at a record low 0.1 per cent at its first board meeting of the year last Tuesday and terminated its $350 billion pandemic bond buying program, citing significant improvements in the jobless rate and the broader strength of the economy.

RBA Governor Philip Lowe remains poised despite the recent pandemic-induced jump in underlying inflation to above 3% last year, waiting for wages growth to drive inflation. He stated that conditions for interest rates were not in place yet with underlying inflation rate at 2.6%. Especially until wages materially lift, the RBA thinks inflation is unlikely to remain sustainably around the upper bound of inflations target. Despite earlier forward guidance that rates won’t rise until 2024, the central bank’s economic forecast have deemed early 2023 or late 2022 as more plausible scenarios

Wages growth between 3-4% is key to ensuring inflation stays sustainably within the 2-3% band and may convince the RBA it’s time to start lifting rates from virtually zero.

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