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RBA flags quicker rate rise as inflation pressures grow

The Reserve Bank has accelerated the potential timing of Australia’s first interest rate rise since 2010 amid tightening inflation pressures as the country’s economy powers back up.

In a highly-anticipated statement after its monthly board meeting, the RBA dumped its previous projection that rates were not expected to begin rising until 2024, suggesting tightening could instead begin a year earlier.

The bank also joined other central banks around the globe loosening COVID-19 stimulus policies by abandoning its low target for bond yields on the back of an improving economic outlook.

The RBA had been using record low interest rates and the bond target to help reinvigorate the economy after the damage wreaked by COVID-19.

However, it has been forced to look at bringing forward rate rises to counter rising inflation amid supply chain bottlenecks and a jump in energy prices.

An unexpectedly high quarterly reading last week lifted the annual underlying inflation rate to 2.1 per cent, putting it back within the RBA’s 2-3 per cent target range for the first time since 2015.

The bank commented in its post-meeting statement on Tuesday that “given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished”.

Governor Philip Lowe later told an online briefing that while rates could be lifted earlier than 2024, subject to wages growth, “there is genuine uncertainty as to the timing of future adjustments”.

The bank said that it was “still entirely plausible that the first increase in the cash rate will not be before the maturity of the current target bond, that is, the bond with a maturity date of April 2024, but it is now also plausible that a lift in the cash rate could be appropriate in 2023”.

The RBA said rates would not be increased “until actual inflation is sustainably within the 2 to 3 per cent target range”.

“This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time. “

The bank sees annual wages growth improving to about 3 per cent by 2023 but cautioned about “the persistence of the current disruptions to global supply chains and the behaviour of wages at the lowest unemployment rate in decades”.

AMP Capital chief economist Shane Oliver said the RBA was “clearly now more upbeat and confident in the (economic) outlook”.

While the bank cut its 2021 growth for the Australian economy to 3 per cent from 4 per cent, most likely because of a bigger-than-expected hit from lockdowns in the September quarter, it raised its growth forecast for next year to 5.5 per cent from 4.25 per cent and held its forecast for a fall in unemployment to 4.25% by the end of 2022.

While some forecasters are tipping rates to begin rising from next year, most see them increasing the following year, though those forecasts are being brought forward.

Deutsche Bank said on Tuesday that it now expected a 0.15 percentage point rise in May 2023, to be followed by another increase of 50 basis points in the second half of 2023.

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