Australia Maintains Monetary Policy As Expected

Australia’s central bank left its monetary policy unchanged, as widely expected on Tuesday, and assessed that the new coronavirus variant Omicron is unlikely to derail the recovery.

The policy board of the Reserve Bank of Australia headed by Governor Philip Lowe decided to leave its cash rate unchanged at a record low of 0.10 percent.

The board also voted to continue with the purchase of government securities at the rate of A$4 billion a week until at least mid February 2022.

The Board reiterated that it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range.

This will require the labor market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the Board is prepared to be patient, RBA added.

Lowe said the emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery. The economy is expected to return to its pre-Delta path in the first half of 2022.

Although inflation is 3 percent, underlying inflation is still low. A further, but only gradual, pick-up in underlying inflation is expected, the bank noted. The central forecast is for underlying inflation to reach 2.5 percent over 2023.

The board observed that as the labor market tightens, wages growth is expected to pick-up. This pick-up is set to be only gradual, although there is uncertainty about the behavior of wages as the unemployment rate declines to historically low levels.

February has recently been a month for some bold action by the RBA Governor, Bill Evans at Westpac said. The governor will need more time before he signals a retreat from the very dovish stance. The first-rate hike will be at the February Board meeting in 2023, Evans said.

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