Interest rates are going up, but not as soon as many are expecting

Author: Paul Ryan - 3 Feb 2022

Source: Interest rates are going up, but not as soon as many are expecting (realestate.com.au)

As the economy continues to outperform, many rate watchers are tipping an interest rate hike in the coming months. Here's why the RBA is in no rush.

This week was a big one for RBA policy. At its monthly board meeting on Tuesday the RBA ended its program of bond buying, also known as ‘quantitative easing’ designed to keep down longer-term interest rates. On Wednesday, governor Philip Lowe outlined the RBA's updated economic forecasts, released in full on Friday.

The better-than-expected performance of the Australian economy, and higher inflation has led many to expect interest rate increases as early as the middle of this year. Even the RBA's upgraded forecasts show inflation exceeding their 2-3% target range this year.

However, the RBA has clearly laid out the case for waiting.

The outlook for the economy remains very uncertain. Inflation has been boosted by supply disruptions and increased demand for goods as people's spending underwent the biggest change since rationing during the Second World War.

This is good policy from the Central Bank and means the first interest rate rise may not be until 2023.

The RBA is waiting for inflation to be sustainably within their target range, once these supply and demand disruptions recede. They are also waiting for wages growth that is consistent with their inflation target, which has been lacking so far.

While other countries are already moving to increase interest rates, Lowe outlined that Australia has the benefit of time. Australian inflation in underlying terms is only now in the middle of the target band, well below outcomes in other economies.

This is a good approach, but it stands in stark contrast with outcomes pre-pandemic.