Canberra: Soaring inflation and an improving job market has not persuaded the Reserve Bank of Australia (RBA) to lift its interest rate from a record low figure.
The RBA board announced on Tuesday that the interest rate would remain at 0.1 per cent, despite the nation’s rapid financial recovery.
The RBA slashed interest rates and launched a A$350 billion ($246 billion) bond buying program in 2020 in an effort to prop up the financial sector during the pandemic.
Back then, RBA Governor Philip Lowe had forecast the low rate would continue until 2024 but by last year the changing economic conditions led some economists to suggest an interest hike could be on the cards in 2022.
In Tuesday’s announcement, the RBA noted that although the Omicron variant of Covid-19 had made a financial impact, it had not “derailed the economic recovery” with the board forecasting the gross domestic product (GDP) to increase by 4.25 per cent in 2022 and 2 per cent over 2023.
The RBA reported that the national job market had recovered strongly, with unemployment falling to 4.2 per cent in December.
The board conceded that inflation had “picked up more quickly than the RBA had expected but remains lower than in many countries”.
Australia’s consumer price index (CPI) inflation rate is 3.5 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions to global supply chains.
In underlying terms, inflation is 2.6 per cent, said the RBA.
Some economists have speculated that the RBA would be reluctant to raise interest rates until there was widespread wage growth, so homeowners would be able to cope with the hike in mortgage costs.
That being the case, an interest rate rise could still be some way off, as the RBA noted wage growth had “only returned to the relatively low rates prevailing before the pandemic”.
“A further pick-up in wages growth is expected as the labour market tightens,” the RBA said.
“This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of wages at historically low levels of unemployment.”
One notable change announced on Tuesday was that the RBA would end its bond purchases program on February 10.
The board said the decision to scrap that program followed a review of the actions of other central banks along with the “functioning of Australia’s bond market and the progress towards the goals of full employment and inflation consistent with target”.
Aside from ending the bond program, the “board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve”, the RBA said.
