Markets: Rates to rise in 2022/2023. RBA: Nope
Link copied to
Benchmark interest rates in Australia are “very likely” to stay unchanged (at 0.1 per cent) until 2024, the RBA says.
RBA governor Philip Lowe provided an update on the central bank’s rates outlook in a speech this morning called ‘The Recovery, Investment and Monetary Policy’.
In discussing the bank’s policy settings, Lowe highlighted that the views of the RBA board have diverged slightly from that of investors, based on current market pricing.
Across Australia, the US, the UK and Canada, markets are now priced for rates to start climbing off the mat as early as next year (then again in 2023).
Lowe noted that the current pricing for rates marks a change from just a few months ago.
(It’s also been accompanied by a rise in bond yields which surprised some investors with its scale and speed.)
However, “this is not an expectation that we share”, Lowe said.
To analyse the divergence, Lowe discussed the “evolution” in the RBA’s approach to one of its core objectives — achieving sustainable inflation growth of between 2-3 per cent.
Before the pandemic, the bank based rate settings on where it thought inflation would go in the future.
Now, it plans to keep rate settings on hold until it sees “actual inflation outcomes in the target range”, Lowe said.
Just as importantly, it needs to be “confident that they will stay there”.
It marks a notable shift in central bank policy. And “for inflation to be sustainably within the 2 to 3 per cent range, it is likely that wages growth will need to be sustainably above 3 per cent”, Lowe said.
Right now, wages growth is at 1.4 per cent — a record low.
Australia’s labour market has made an impressive recovery from the pandemic. But it’s not the only advanced economy dealing with anaemic wage growth, which Lowe attributed to a number of complex forces such as technology and changes in the global supply of labour.
So the evidence in Australia and overseas suggests the move back towards three per cent wage growth “will take time”.
Lowe added that the central bank is expecting to see inflation growth jump back above three per cent this June.
That will be due in part to low base effects, stemming from some unique prices changes in the June 2020 quarter caused by the pandemic.
However, “the point I want to emphasise is that for inflation to be sustainably within the 2–3 per cent target range, wages growth needs to be materially higher than it is currently”, Lowe said.
Elsewhere in his speech, Lowe said the Australian economy is still operating well below capacity.
And to assist the recovery, he repeated his request for a “strong and sustained pick-up in business investment”.
Since 2006, non-mining business investment has steadily declined from 12 per cent of GDP to around 8 per cent.
While there is no “magic ingredient” for business investment, Lowe said it’s a by-product of a number of factors business confidence.
(Incidentally, NAB’s monthly business survey for February, released yesterday, showed business confidence just rose to its highest level since 2010.)
He also cited a stable regulatory framework and the risk appetite and capabilities of companies themselves as two other key drivers.
So while the RBA still says rock-bottom rates are here to stay until 2024, it said business investment is another one of the key factors required to move them.
“Globally, higher levels of investment relative to savings are also one of the keys to a return to more normal levels of interest rates over the medium term,” Lowe said.