Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz
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SYDNEY, March 15 (Reuters) – Australia’s central bank remains poised to be patient on raising interest rates while waiting for wage growth to pick up, despite warning that a war-in-Ukraine war-induced spike in commodity prices could result would increase inflationary pressures.
Minutes of its March meeting released on Tuesday showed the Reserve Bank of Australia (RBA) board was generally optimistic about the domestic outlook, with labor market conditions the tightest since 2008.
However, the prospects for the global economy have been clouded by the conflict in Ukraine.
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“The invasion had created additional uncertainty about the global outlook and was a negative supply shock that would lead to lower growth and higher inflation,” the minutes said.
Nonetheless, Board members agreed that it was too early to conclude that inflation would not fall back out of the 2-3% target range once supply pressures eased, noting that wage growth was still growing lag behind.
“The Board stands ready to be patient as they monitor developments in the various factors affecting inflation in Australia,” he concluded.
The central bank left interest rates at a record low of 0.1%, in line with broad expectations, at the March meeting, although RBA Governor Philip Lowe said it was plausible a first rate hike could come later this year should the Economy recover as expected.
So far, economic activity has surprised with its resilience as households’ consumed extra savings have accumulated during the pandemic to be spent with gusto.
A wave of omicron cases, the rising cost of living and massive East Coast flooding have tested confidence but not dented the recovery.
The job market was particularly impressive, producing a record streak of jobs that took unemployment to a 13-year low of 4.2%.
RBA Governor Philip Lowe is aiming to bring unemployment below 4% for the first time since the 1970s and is willing to keep interest rates low to get there and hopefully raise wages.
Complicating that mission is a recent surge in global commodity prices that is sure to lift inflation above the RBA’s already high forecasts.
Core inflation is at a relatively manageable 2.6%, but analysts suspect it will surge above 3% in the March quarter and continue to rise in the June quarter.
This is one of the main reasons why financial markets are pricing in a first rate hike to 0.25% in June and a series of hikes to at least 1.25% by year-end.
Such rapid tightening would come as a shock to borrowers, many of whom have not seen an official rate hike since the last RBA hike was in 2010.
Households are so indebted that many analysts believe interest rates don’t need to rise far to really rein in spending, with some predicting a peak of 1.75-2.0% and some as low as 1.25%.
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Reporting by Wayne Cole; Edited by Kim Coghill
Our standards: The Thomson Reuters Trust Principles.
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