RBA holds steady on cash rate

Although some market watchers have predicted that the Reserve Bank of Australia will have to raise the cash rate earlier than it expects, the central bank continues to see only muted inflation risks in the coming years, reiterating that rates will likely remain low until 2024 “at the earliest.”

In the minutes of its recent policy meeting, published Tuesday, the RBA said it saw little risk of a wages breakout in the near future, since there is still plenty of spare capacity in the job market, according to a report by The Australian.

“Despite the strong recovery in economic activity in Australia, wage and price pressures remain subdued,” the RBA said. “A pick-up in inflation and wages growth was expected, but this was likely to be only gradual and modest despite the lift in the forecast for output growth.”

Global bank UBS recently predicted that the central bank may have to hike the cash rate before 2024 due to the size of the fiscal stimulus announced in the federal budget last week.  However, the RBA is targeting a return to full employment over the coming years, which could mean the unemployment rate would need to drop below 4% from its current 5.6% – and remain there for some time – before wages begin to rise and inflation hits the RBA’s 2%-3% target, The Australian reported.

The economy is healthy, largely thanks to the containment of the COVID-19 pandemic, which has allowed many businesses to return to normal – or almost normal – operations. The RBA recently upgraded its GDP growth forecast for 2021 to 4.75%, a sharp spike from February’s prediction of 3.5%. Employment creation also continues to surge.

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That surge in job creation has led a number of economists to lower their forecasts for unemployment by the end of the year – and warn that the RBA may be forced to hike the cash rate prior to 2024.

The central bank itself examined several future inflation scenarios in its minutes.

“Members noted that the extent of spare capacity in the economy at the end of the forecast period was uncertain, which meant the gradual increase in inflation could be slower or faster than envisaged,” the RBA said.

The RBA said that how consumers spend extra household income run up over the last year could determine the path for inflation and interest rates, The Australian reported.

“A stronger economic trajectory than the one envisaged in the baseline scenario was possible if households increased spending by more than expected. … In this upside scenario, inflation would increase to around 2.25% by mid-2023,” the RBA said.

Ryan Smith is currently an executive editor at Key Media, where he started as a journalist in 2013. He has since he worked his way up to managing editor and is now an executive editor. He edits content for several B2B publications across the U.S., Canada, Australia, and New Zealand. He also writes feature content for trade publications for the insurance and mortgage industries.
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