The RBA Board has left all monetary policy settings (cash rate target 0.1%, rate on ES balances 0%) unchanged at today's meeting, reaffirming its patient stance in light of the Ukraine war and uncertainty over the evolution of wage and inflation dynamics in Australia.
Today's decision statement from Governor Philip Lowe highlighted the war in Ukraine as a "major new source of uncertainty" to the global economic recovery, which is seen adding upward pressure to inflation due to disrupted supply chains and surging energy prices. The observed effect has been a tightening in financial conditions, with bond yields and rate hike expectations lifting.
Domestically, Governor Lowe outlined that the resilience of the economy was leading to a rebound in conditions from the Omicron wave and was supporting a tightening in the labour market, with rates of unemployment and underemployment at their lowest since 2008. Worker absences during the peak in January had led to a large fall in hours worked, though forward-looking indicators from job vacancies suggested the strength in labour demand would drive a rebound in activity.
In spite of the tightening in the labour market, wages growth was observed as being "...around the relatively low rates prevailing before the pandemic" following last week's Q4 Wage Price Index (WPI) data. The pace at which wage pressures emerge as unemployment falls further to historically low levels is a key unknown for the Board. Governor Lowe hinted that the Board would be looking at labour cost measures as a lead indicator for movements in the WPI.
Pandemic-related supply constraints and high petrol prices are expected to keep putting upward pressure on inflation over the coming quarters before easing late in 2022 and into 2023. However, that forecast hinges on a fairly orderly resolution to supply constraints, something made considerably more uncertain by the surge in global energy prices.
Governor Lowe's final paragraph reiterated that monetary policy was being kept accommodative to support the push towards full employment. The main message is that until there is more clarity over the build-up of wage pressures and the persistence of inflation, the Board will be patient in adjusting policy, leaving market pricing for at least 100bps of hikes in 2022 continuing to look well adrift.
