Some important changes in the language of its post meeting statement on Tuesday are a clear indication that the Reserve Bank has moved closer to lifting interest rates this year.
The changes indicate the RBA no longer has the patience to sit and wait to see what wages, inflation and jobs do and whether inflation takes off. It is taking off thanks to the impact on energy prices from the Russian invasion of Ukraine in late February and Australian mortgage holders and businesses will feel the impact via a rate rise sooner than it seemed a month ago.
The change in the wording in the key final paragraph of the statement issued after Tuesday’s meeting saw the word “patient” that had been in previous statements for several months now, dropped and a more complex phrasing introduced that suggests the central bank is now looking to a rate rise and not sitting and looking.
In ‘losing’ its patience, the RBA has abandoned its stance of waiting for wage rises to top the 3% level. It is now more concerned with further rises in inflation – we get the March quarter consumer price data at the end of this month with what is forecast to be a 4% plus rise in headline inflation.
The change in wording overshadowed the outcome of Tuesday’s board meeting – the last before a May federal election – which saw the bank leave its official cash rate unchanged at a record-low 0.1%, where it has been since November 2020.
But that record low is unlikely to last much longer as economists immediately saw the omission of the word “patient” – and the change in emphasis of linking pay rises to inflation being in the bank’s target range of 2% to 3% – as signalling the central bank knows it is approaching its first rate more than two years.
This what the bank’s final paragraph in the April statement said on Tuesday:
“The Board’s policies during the pandemic have supported progress towards the objectives of full employment and inflation consistent with the target. The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates. Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target. Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs. The Board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target.”
That is a significant change from the final paragraph from the March post meeting statement:
“The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target range. There are uncertainties about how persistent the pick-up in inflation will be given recent developments in global energy markets and ongoing supply-side problems. At the same time, wages growth remains modest and it is likely to be some time yet before growth in labour costs is at a rate consistent with inflation being sustainably at target. The Board is prepared to be patient (our emphasis) as it monitors how the various factors affecting inflation in Australia evolve.”
The word “patient’ anchored and explained the RBA’s policy stance for the past few months – no change despite growing evidence of rising inflation, rapidly rising employment and a very strong pace of activity – especially in household consumption.
Dr Lowe said while inflation had lifted, and would likely go higher in the coming months, it was still lower than in many other nations.
“Higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters, with an updated set of forecasts to be published in May,” he said.
“The main sources of uncertainty relate to the speed of resolution of the various supply-side issues, developments in global energy markets and the evolution of overall labour costs.”
The hawkish statement from the RBA saw the ASX lose much of the day’s rise of around 50 points before the statement was issued at 2.30pm Sydney time – it ended up 14 points or so for the ASX 200.
The Aussie dollar jumped to top 76 US cents for the first some since mid 2021. It was around 76.35 in early European trading last night.
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In a note issued late Tuesday, AMP Chief Economist Shane Oliver said the change in wording “suggests that the RBA is becoming more confident that the pickup in inflation will be sustained.”
“…taken with recent commentary from RBA Governor Lowe about the need to “maintain low and stable inflation in Australia”, the RBA is likely also getting more concerned that inflation expectations will move higher resulting in higher for longer inflation.
“The RBA’s reference to “important” inflation and wages data in coming months – with March quarter inflation due in late April and March quarter wages data due in late May – suggests its now waiting for these to confirm the pickup in inflation and wages.
“Of course, it also suggests that its unlikely to raise rates at its May meeting which will be in the election campaign as wages data won’t be available before that meeting. This may be a relief to the Government but there will no doubt be lots of talk about rising rates through the election campaign particularly as March quarter inflation data will likely be very high.”
Dr Oliver thinks a rate rise will come in June and Dr Oliver thinks the increase could be 0.4% to take it to 0.50%, with the rate reaching 1% by year’s end.
