A subdued update of wages growth last week should see the RBA reaffirming its patient stance by leaving all monetary policy settings unchanged at today’s meeting (decision due at 2:30PM AEDT). With the Australian economy rebounding strongly from the Omicron wave and underlying inflation only recently returning to the middle of the 2-3% target band for the first time in 7 years, the Board can keep its sights set on pressing for more progress towards full employment.
At the February meeting, the Board announced an early end to its QE program in response to upgraded unemployment and inflation forecasts, with Governor Lowe subsequently saying in his Year Ahead speech that hiking rates in 2022 was a plausible scenario based on its revised outlook. However, in light of uncertainty around the evolution of wage-price dynamics, the RBA has repeated it is prepared to be patient by taking a data-dependent approach to policy.
While underlying inflation is back at the midpoint of the target, it is assessed as being primarily driven by pandemic-related supply issues, while wages growth, identified as one of the guidepost posts for the inflation outlook, was only back around its pre-pandemic pace in Q4. All this points to the RBA retaining its patient stance today in the face of aggressive market pricing that has at least 100bps of hikes priced in over 2022.
Since the February meeting, the international borders have reopened and remaining pandemic restrictions have been (or will soon be) eased, providing confidence to the Board that the domestic outlook is on track, though the flooding in south-east Queensland and northern New South Wales has been an unexpected setback. Offshore, the global outlook has been clouded by geopolitical turmoil and heightened volatility in financial markets.
