The RBA Board left the cash rate target unchanged at 0.1% today, though in a hawkish tilt in the decision statement from Governor Philip Lowe, its patient message on policy has been removed in response to upside risks to inflation.
The RBA started moving away from its emergency pandemic settings last November when it discontinued its 3-year yield target before bringing QE to an early end in February. The policy rate is the last tool in the sequence to be adjusted and the Board has hinted this could come as early as June, in line with market pricing.
Since the November meeting, the line from the RBA has been that it will be patient in raising rates, waiting for a tightening labour market to drive wages growth higher to rates consistent with keeping inflation in the 2-3% target band. But the spillover effects from the Ukraine war (particularly on petrol prices) and ongoing supply constraints mean the RBA will be revising higher its inflation forecasts in May's quarterly statement. Currently, it expects inflation to peak in Q2 at 3¾% on the headline rate and at 3¼% on the underlying measure.
Although upside risks attend the inflation outlook and the labour market has made faster progress toward full employment (and further tightening is still expected) than the RBA had forecast, the indications from today's statement are that upward pressure on wages will remain a gradual process. This is also from a weak starting point, with the governor pointing out that labour costs are running below a pace consistent with delivering sustainable 2-3% inflation. These could be interpreted as signs of pushback to very hawkish market pricing that sees the cash rate rising to 1.75% by year-end.
With the patient reference removed, the main message in the final paragraph of the governor's statement was that the data on inflation and labour costs "over coming months" would be key. The statement was closed out by giving greater prominence to the inflation side of the RBA's mandate, broadening the recent focus of policy that has been centred on achieving full employment.