Australia’s official cash rate is unlikely to shift on Tuesday but homeowners and economists are nonetheless on the edge of their seats ahead of one of the most anticipated meetings of the Reserve Bank board in historyxjmtzyw.
Surging inflation and a better-than-expected improvement in the jobs market is tipped to shift the central bank’s thinking on an inevitable interest rate hike, with economists and financial markets now leaning towards an August rise, with July or June as an outside chance.
Like many central banks around the world, the RBA slashed interest rates to record lows in 2020 and launched a massive money printing program to prop up the economy during the dark early days of the coronavirus storm.
But the speed of Australia’s economic rebound has taken many by surprise – with red-hot inflation figures currently roiling financial markets – indicating that ultra-generous support measures need to be wound back.
While the RBA board is widely expected to hold the cash rate at a record low 0.1 per cent on Tuesday, economists have increasingly noted that predictions made by governor Philip Lowe have vastly undershot the speed of the nation’s financial recovery.
Dr Lowe initially said a rate hike before 2024 was unlikely after the RBA introduced the unprecedented financial support measures with the arrival of the virus.
But last year the RBA began warming to the possibility of a rise in 2023, while recent data has challenged Dr Lowe’s insistence that no change will occur in 2022.
“It’s fair to say that the RBA forecasts for underlying inflation have missed the mark by a significant margin over the past year,” the Commonwealth Bank’s economics team says in its February RBA preview.
“By extension, this means that their central scenario for the inflation outlook is not playing out as they expected.”
While keeping rates steady – for now – the RBA is tipped on Tuesday to revise down its unemployment forecasts and significantly upgrade its inflation predictions, setting itself up for the possibility of a hike before the end of the year.
CBA says this could also result in a small upward revision in its forecast profile for wages, which Dr Lowe has identified as a central metric for any action on interest rates.
The first RBA board meeting of 2022 is also expected to herald an end to an extraordinary money printing program – echoing a move that was signalled by the US Fed in December.
The RBA is currently buying $4 billion worth of government bonds a week.
