At its meeting today, the Board decided to maintain the cash rate target at 10 basis points and the interest rate on foreign exchange settlement balances at zero percent.
The global economy continues to recover from the pandemic. However, the war in Ukraine is a major new source of uncertainty. Inflation in some parts of the world has risen sharply due to sharp increases in energy prices and disruptions to supply chains at a time of high demand. The prices of many basic products have increased further due to the war in Ukraine. Bond yields have risen over the past month and expectations for future key interest rates have risen.
The Australian economy remains resilient and spending is picking up after the Omicron setback. Household and business balance sheets are generally in good shape, a recovery in business investment is underway and there is a significant pipeline of construction work to be completed. Macroeconomic policy settings continue to support growth.
The resilience of the economy is evident in the labor market, with the unemployment rate at 4.2%, its lowest level in 14 years. Underemployment is also around its lowest level since 2008. Hours worked fell significantly in January due to the Omicron outbreak, but falling infection rates and high job vacancies indicate a strong rebound in the coming months. The RBA’s central forecast is for the unemployment rate to fall below 4% later this year and stay below 4% next year.
Wage growth has accelerated but, at the aggregate level, is only around the relatively low rates that prevailed before the pandemic. Further acceleration in wage growth and broader measures of labor costs are expected as the labor market tightens. This recovery should still be only gradual, even if uncertainties persist as to the behavior of labor costs at historically low levels of unemployment.
Inflation has picked up faster than expected by the RBA, but remains lower than in many other countries. Under the central forecast, core inflation is expected to increase further in the coming quarters to around 3¼%, before falling back to around 2¾% in 2023 as supply issues are resolved and patterns of consumption will normalize. The CPI inflation rate will climb higher than this due to rising gasoline prices as a result of global developments. The length of time it will take to resolve supply chain disruptions is an important source of uncertainty about the inflation outlook, as is developments in global energy markets.
Financial conditions in Australia remain very accommodative. Interest rates remain at a very low level, although some fixed rates have increased recently. The Australian dollar exchange rate is hovering around its lows of last year. House prices rose sharply, although the rate of increase slowed in some cities. With interest rates at historic lows, it is important that lending standards are maintained and that borrowers have sufficient reserves.
The Board is committed to maintaining very supportive monetary conditions to achieve its objectives of returning to full employment in Australia and inflation on target. The Commission will not raise the cash rate until real inflation is permanently within the target range of 2-3%. Although inflation has picked up, it is too early to conclude that it is permanently within the target range. There is uncertainty about the persistence of the inflation pick-up, given recent developments in global energy markets and ongoing supply-side issues. At the same time, wage growth remains modest and it will probably take some time before labor cost growth reaches a pace consistent with sustained inflation at the target level. The Council stands ready to be patient as it monitors the development of the various factors affecting inflation in Australia.