Reserve Bank of Australia Governor Philip Lowe has shot down claims a rate hike could happen next year, saying it is “plausible” the cash rate will not move before 2024.

In a speech to the Australian Business Economists, Mr Lowe said recent hikes in Australia’s inflation rate have been “more muted” than those seen overseas and are most likely temporary, and as such there is little case for a rate hike in the next 12 months.

“The latest data and forecasts do not warrant an increase in the cash rate in 2022,” he said.

“The economy and inflation would have to turn out very differently from our central scenario for the Board to consider an increase in interest rates next year.”

Mr Lowe’s comments come after the RBA called off its yield curve control program – which was intended to keep rates lower for longer – at its November board meeting. 

That announcement prompted speculation from economists (including AMP Capital’s Shane Oliver) that rates could begin rising as early as November next year.

Although Mr Lowe acknowledged the inflation outlook is “more uncertain than it has been for some time”, he used his speech on Tuesday to dismiss these fears, telling Australian Business Economists that rates will remain flat until inflation is well within the RBA’s 2-3% target band.

“Our central scenario is that underlying inflation reaches the middle of the target by the end of 2023. If this comes to pass, it would be the first time in nearly seven years that we will be at the mid-point,” Mr Lowe said.

“This, by itself, does not warrant an increase in the cash rate. As I have said, much will depend upon the trajectory of the economy and inflation at the time. It is still plausible that the first increase in the cash rate will not be before 2024.”

Inflation pressure caused by abrupt demand shift

Australia recorded inflation of 0.7% in the September quarter, bringing the rate for the 12 months prior to 2.1% – slightly higher than was expected.

Even so, Mr Lowe noted this only places it at the lowest end of its target band and also well below the average for the previous 30 years.

Importantly, there are also “significant differences” between the underlying causes of inflation in Australia and elsewhere in the world, where central banks will likely have to increase rates to keep inflation in check.

“The first of these [differences] is energy prices. Energy prices in Australia have been trending lower for a number of years, after earlier large price increases,” he said.

Mr Lowe noted that while many people overseas are battling large increases in energy prices as their power grids struggle to meet demand, the increased capacity from solar and wind generators in Australia has helped keep downward pressure on local wholesale prices.

“The second and more important difference is what has been happening in the labour market. 

“Labour force participation in Australia remains high and the wage-setting processes – including multi-year enterprise agreements and the annual minimum wage case – impart a degree of inertia into aggregate wage outcomes.”

In other words, Mr Lowe said wages in Australia will climb, but will do so more slowly than has been seen in the US and UK, with local employers seeking to find other ways to attract talent rather than bid up salaries. 

“There are some jobs that are in very high demand where wages have increased, but we are yet to see a broad-based pick-up in wages growth.”

Sources:

• Reserve Bank of Australia, Recent Trends in Inflation
• Reach Markets, Reserve Bank paves the way for interest rate hikes as early as 2022