The RBA left the cash rate unchanged at a record low 0.1 per cent: Omicron won’t derail recovery

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

 

Reserve Bank of Australia governor Philip Lowe says the emergence of the Omicron strain of the coronavirus is a new source of uncertainty, but he does not believe it will derail the economic recovery.

The RBA left the cash rate unchanged at a record low 0.1 per cent at its final board meeting of the year.

Dr Lowe said the Australian economy is recovering from the setback caused by the Delta variant and expects growth to return to its pre-Delta path in the first half of 2022.

“The emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery,” Dr Lowe said in a statement on Tuesday.

He said leading indicators are pointing to a strong recovery in the labour market, with job advertisements at an historically high level and firms finding it difficult to hire workers.

Wages growth has returned to the relatively low rates prevailing before the pandemic, but a further pick-up is expected as the labour market tightens.

“This pick-up is expected to be only gradual, although there is uncertainty about the behaviour of wages as the unemployment rate declines to historically low levels,” Dr Lowe said.

While inflation has increased, in underlying term it remains low at 2.1 per cent and is not expected to reach 2.5 per cent until 2023.

The central bank will continue to buy government bonds at a rate of $4 billion a week to keep market interest rates and borrowing costs low.

The RBA will review this program when it next reconvenes in February.

Economists expect at that stage it will be able to trim the program or scrap it altogether as the economy recovers.

“The board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target,” Dr Lowe said.

He reiterated the board will not increase the cash rate until actual inflation is sustainably within the two to three 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,” he said.

“This is likely to take some time and the board is prepared to be patient.”

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