Wayne Cole

SYDNEY, (Reuters) – Australia’s central banks kept their cash rate at 0.1% Tuesday. They also ended the A$275 billion bond buying campaign ($194.40 trillion) as per plan. However they resisted market bets that would have seen a rate increase.

After wrapping up February’s policy meeting, Reserve Bank of Australia (RBA), stressed that stopping bond purchases “does not indicate” an immediate increase in interest rate and was willing to wait.

Philip Lowe (RBA Governor) stated in a short statement that “as the Board had previously stated, it will not increase cash rate until actual inflation sustainably falls within the 2 to 3 percent target range.” While inflation has risen, it’s too soon to say that it is within the target area.

In response to the dovish message, $0.7036 fell 0.4% on the local dollar. Lowe will give a speech about policy Wednesday, and the bank will publish a complete set of economic forecasts Friday.

Analysts had expected to see an end to bond purchasing as quantitative easing no longer was required. With unemployment dropping to 4.2% over the past 13 years and core inflation rising to 2.6% in seven years, most analysts were right. [AU/INT]

This was quite shocking considering that the RBA believed core inflation would remain below 2.5% through the end of the year.

Lowe predicted that the core inflation would rise to about 3.25% during the coming quarters before decreasing to 2.75% by 2023. Lowe predicted that unemployment would fall to below 4 percent later in the year, and will be at 3.75% by next year.

The markets have been betting for a while that the RBA would eventually blink at inflation and increase rates in May. There will be four more hikes up to 1.25% by December.

Given the likelihood of a nationwide election being called that month, a May move could also prove to be politically hot.

New Zealand’s central banks have already increased twice against global inflationary pressures. The U.S. Federal Reserve flagged its first tightening in March.

Although the RBA has been unable to see a change in wage growth, it is prepared to continue to watch for improvements after many years of disappointing outcomes. Lowe would like to see an increase in annual wages of 3%, rather than the 2.2% currently observed and at a rate not seen since 2013.

Lowe reiterated Tuesday that “Wages growth remains modest” and said it was likely that the aggregate wage growth will not be at an rate compatible with sustained inflation.

Consumer spending was affected by coronavirus in January. However, this followed an increase in December quarter sales that pointed to a strong economic recovery.

RBA expected that economic growth would be steady at 4.5% this year and slow to 2% in 2023.

Lowe stated that the Omicron virus has had an impact on the economy but has not impeded the recovery process.

($1 = 1.4146 Australian dollars)