The Central Bank of Australia is deciding to keep its monetary rate at a friendly low of 0.1% as markets opened on Tuesday, and it at the same time stopped its AUD275 billion (USD194.40 billion) bond purchase campaign as many market players have been expecting, but resisted market bets for an early rate hike.
No Cause for Rush
While concluding its February Monetary Policy meeting, the Reserve Bank of Australia reinforced the opinion that stopping its bond-buying does not directly translate to a near-term interest rate hike, and importantly, the bank’s board was going to be patient over making a decision on that.
The Reserve Bank of Australia’s Governor, Philip Lowe, mentioned at a press brief that the board’s earlier decision not to increase interest rates until there is inflationary sustainability within the 2% – 3% target range still stands. He said that although inflation has reached a peak, it is still too soon to reach a conclusion on whether it is within the target area.
The governor’s assuring comments still witnessed the Australian dollar dip a little to $0.7055, and the money market thinks the Reserve Bank is responsible for the inflationary curve. Governor Philip Lowe is therefore scheduled to deliver a statement on the monetary policy on Wednesday, while the bank will publish a new set of economic predictions on Friday.
A lot of analysts were expecting the Reserve Bank to stop buying bonds as such was no longer needed as unemployment rates have dropped to a thirteen-year low at 4.2% while inflation has surged to a seven-year high of 2.6%.
The inflation rate was a rude shock with the fact that the Reserve Bank predicted that inflation would not get to 2.5% till the year’s end.
New Future Predictions
As a result, the Reserve Bank governor said inflation is now predicted to climb up to 3.25% in the coming months before it settles back to about 2.75% in 2023. Unemployment is predicted to fall under 4% in the course of this year and is likely to be down to 3.75% by the end of 2023.
The market has placed a bet that the Reserve Bank will rescind its decision on a rate increase and introduce an increase by May, and possibly up to four more increases to 1.25% already priced in by December.
It is like there will be a national election called in May, and a rate increase at that time will have political consequences.