RBA’s Lowe softens rate outlook, acknowledges faster inflation

Bloomberg

Australia’s central bank chief Philip Lowe opened the door to an interest-rate increase before 2024 as policy makers acknowledged quicker consumer-price gains last quarter had altered the inflation picture.
Lowe said in a speech Tuesday that a rate hike in 2024 was “still plausible,” while adding that a quicker return to the bank’s inflation target could make the case for an earlier lift in the cash rate. That’s a step back from previous guidance that conditions for a rate rise will not be met before 2024. The governor did however reiterate that a hike next year wasn’t warranted.
The change underlines mounting pressure on global central banks to combat strong inflationary currents with traders already pricing in tightening for economies that are only just emerging from the pandemic. Lowe said his expectation remained that faster wages and inflation will come gradually.
“The use of ‘still plausible’ rather than ‘our central case’ is a softening of their view,” said David Plank, head of Australian economics at Australia & New Zealand Banking Group Ltd. “They’re emphasising that point to prepare the way for possibility that they may have to move a lot sooner than they think.”
The RBA has kept rates at a record-low 0.1% and reiterated it will not be lifted until inflation is “sustainably” within its 2-3% target. For that to happen, the jobless rate will need to fall to 4% or lower and wages growth will have to push above 3%, conditions Lowe sees as unlikely to be met for about two years.
“I remain incredibly optimistic about the medium-term prospects for this country,” the governor said in response to a question after his speech. “I do recognise that price pressures are weak.”
Inflation hitting the 2.5% midpoint of the target by itself “does not warrant an increase in the cash rate,” Lowe added. “Much will depend upon the trajectory of the economy and inflation at the time.”
Lowe’s dovish stance has been challenged by rate traders, emboldened by rapid Covid-19 immunization rates and an earlier-than-expected reopening of the nation’s economy.
Market pricing now implies at least three rate increases next year with a chance of a fourth hike.
In minutes of the RBA’s November 2 meeting, the RBA reaffirmed its decision to continue with its A$4 billion ($3 billion) a week bond program until mid February 2022, when it will be reviewed. This will be based on three considerations: