Interest rates on hold but experts tip a rise is coming

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PHOTO: The Reserve Bank of Australia opted to keep the cash rate at a historic low of 0.1 per cent in April 2022.

The Reserve Bank of Australia has again opted to keep interest rates on hold at 0.1 per cent as they eye the likelihood of increased inflation over the coming months.

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In his April monetary policy statement, RBA Governor Dr Philip Lowe noted Australia’s current inflation was well below that of many other countries, but high fuel and commodity prices would likely result in further inflation increases over the coming quarters.

At present underlying inflation is sitting at 2.6 per cent, or 3.5 per cent in headline terms.Those supply issues are being driven by both the war in the Ukraine and the ongoing impact of Coronavirus. Updated forecasts are set to be released in May, but Dr Lowe said the main sources of uncertainty related to “the speed of resolution of the various supply-side issues, developments in global energy markets and the evolution of overall labour costs”.

“In response, bond yields have risen and expectations of future policy interest rates have increased,” Dr Lowe said.

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However, despite increasing inflation, Dr Lowe said the Australian economy remained strong, with spending picking up following the Omicron outbreak.

“Household and business balance sheets are in generally good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed.

“Macroeconomic policy settings also remain supportive of growth and national income is being boosted by higher commodity prices.

“At the same time, rising prices are putting pressure on household budgets and the floods are causing hardship for many communities.”

Dr Lowe noted the strength of the economy was particularly evident in the labour market where unemployment fell further to 4 per cent in February, while underemployment was also at its lowest rate in years.

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“The RBA’s central forecast is for the unemployment rate to fall to below 4 per cent this year and to remain below 4 per cent next year,” he said.

Low unemployment has also resulted in wages growth, although at present that remains low.

“Given the tightness of the labour market, a further pick-up in aggregate wages growth and broader measures of labour costs is in prospect,” Dr Lowe said.

“This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of labour costs at historically low levels of unemployment.”

In the interim, Dr Lowe said financial conditions in Australia continue to be “highly accommodative”.