Hike rates

Australia’s central bank ends bond purchases, in no rush to raise rates

Band Wayne Cole

SYDNEY, February 1 (Reuters)Australia’s central bank kept its cash rate at a record low of 0.1% on Tuesday and ended its A$275 billion ($194.40 billion) bond buying campaign as planned, but strongly pushed back on market bets for an early rate hike.

Concluding its February policy meeting, the Reserve Bank of Australia (RBA) stressed that halting bond purchases “did not imply” a short-term increase in interest rates and that the Board was still ready to be patient.

“As the Board has previously stated, it will not raise the cash rate until actual inflation is sustainably within the 2-3% target range,” RBA Governor Philip said. Lowe, in a brief statement. “While inflation has picked up, it is too early to conclude that it is sustainably within the target range.”

The dovish message saw the local dollar slide 0.4% to $0.7036 AUD=D3 in response. Lowe is due to deliver a policy speech on Wednesday and the bank will release a full set of economic forecasts on Friday.

Most analysts had expected bond buying to end as such quantitative easing was no longer needed, with unemployment falling to a 13-year low of 4.2% and core inflation reaching a seven-year high of 2.6%. AU/INT

The latter was a major shock given that the RBA had thought that core inflation would not reach 2.5% before the end of next year.

As a result, Lowe said core inflation is now expected to rise to around 3.25% over the next few quarters, before falling back to 2.75% in 2023. Unemployment is expected to fall below 4% later. this year and be around 3.75% at the end of next year.

Markets have long been betting that the RBA will eventually blink on inflation and raise rates as early as May, with four more hikes to 1.25% expected by December. RBATCH

A move in May would also be a political hot potato given that a national election is likely to be called that month.

New Zealand’s central bank has already hiked twice in the face of global inflationary pressures, and the US Federal Reserve announced its first tightening for March.

The RBA, however, is still ready to wait for wages to pick up after years of lackluster results. Lowe wants to see annual wage growth reach 3% or more, up from 2.2% currently and a pace not seen since 2013.

“Wage growth also remains modest and it will likely take some time before overall wage growth reaches a pace consistent with sustainably on-target inflation,” Lowe repeated on Tuesday.

A rise in coronavirus cases hit consumer spending in January, but that followed a frenzy in the December quarter that points to considerable economic momentum.

The RBA still expects economic growth to hold steady at a solid 4.5% this year, before slowing to 2% in 2023.

“The Omicron outbreak has affected the economy, but it hasn’t derailed the economic recovery,” Lowe concluded.

($1 = 1.4146 Australian dollars)

(Reporting by Wayne Cole; Editing by Sam Holmes)

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