February interest rate announcement: RBA holds cash rate at 0.1 per cent despite inflation rising faster than expected

The Reserve Bank of Australia has kept the official interest rate on hold at its first meeting of the year, despite inflation rising faster than its expectations.

At its monthly meeting on Tuesday, the RBA board also agreed to end its quantitative easing program after its final bond purchases on February 10, but stated that this won’t necessarily translate to a near-term increase to interest rates.

The central bank’s quantitative easing program began in March 2020, with bond buying, record low interest rates and the term funding facility helping to stimulate the economy as the coronavirus pandemic hit.

The RBA has been buying bonds at a rate of $4 billion per week since September, with the total bonds purchased expected to reach $350 billion by the program’s end.

• Read more: When will interest rates rise and how can home buyers and owners prepare?

But experts believe mounting inflation pressures mean it’s only a matter of time before the central bank lifts the cash rate target, with many economists now predicting a rise before the end of the year.

“While we don’t know precisely when it will come, it’s definitely going up at some point, so households should start gearing up now for that likelihood,” said HSBC economist Paul Bloxham.

“While the Reserve Bank originally said it wouldn’t rise until 2024, it’s quite clear it will happen before that, and it could be as soon as this year, but more likely in early 2023.  People now have to start factoring that into their decision-making.”

Inflation in the US has jumped to an annual rate of 7 per cent off the back of a domestic economy that has grown faster than expected – 5.7 per cent last year. 

The latest Consumer Price Index (CPI) in Australia also rose more than forecast, by 1.3 per cent in the last quarter of 2021, bringing inflation to a total of 3.5 per cent over the year.

The biggest price rises were for new homes at 4.2 per cent, and petrol at more than 6.6 per cent.

Even when the annual inflation rate was trimmed, however, by taking out the biggest price rises and falls, it would still hit 2.6 per cent, the highest rate since 2014.

At the same time, the Australian Bureau of Statistics reported that the unemployment rate fell to 4.2 per cent, in a continuing sign that the economy is bouncing back – despite the derailment of the Omicron variant – much more strongly than was imagined.

Yet none of that seems to be feeding into any real wages growth, another of the key indicators the Reserve Bank looks at when deciding interest rate movements.

The RBA has consistently stated that the cash rate won’t be increased until inflation is sustainably within the 2 to 3 per cent range, conditions requiring a tighter labour market and higher wages growth.

“I think it would be a mistake for them to raise the rate too soon,” said Craig Emerson from Emerson Economics. “While the US inflation rate is high, their CPI composition is different to ours with a heavy weighting of new and used cars that we don’t have.”

“And while we’ve got a bit of a price spiral going on here, it’s more associated with supply constraints and disruptions rather than any excess of demand over supply.”

“We’ve got a strong labour market but we haven’t seen any real wage growth, so an interest rate rise would see people really getting screwed. And [Reserve Bank governor] Phil Lowe doesn’t want to destroy the recovery!”

There’s simply too much uncertainty at the moment to risk a rate rise, Mr Emerson believes. No one knows yet if Omicron is spent, or whether a new variant might emerge to spook the economy and do even more damage. 

Certainly, the federal government wouldn’t take kindly either to a rate rise before a possible May election date, or too soon on its tails, believes CreditorWatch chief economist Harley Dale.  

“We could have a rate rise late in 2022, but at the moment I suspect we are going to see the Reserve Bank clearly signalling that they’re not going to do anything in a hurry,” he said. “There’s still so much flux in the economy with the start of the year being impacted considerably by Omicron and a lot of small to medium-sized enterprises getting pretty smashed.”

“We won’t really know for another six to eight weeks the true impact. But there’s a lot of uncertainty out there so the Reserve Bank won’t want to make that any worse. Wages growth is still very lacklustre, too, and with the CPI going up and real wages going backwards, and the cost of housing rising, I think they’ll sit back for a while to get the pulse of the economy before doing anything.”

With the big commercial banks already raising their rates of various types of loans, households will be suffering enough jitters anyway. 

The rate of price rises in the housing market is already softening now, so the prospect of one cash rate rise in the near-future, to be followed quickly by others, could severely affect the property market, feels Peter Baldwin, director of national agency Richardson & Wrench.

“That would be the first hit on the market,” he said. “The cost of money is the single biggest influence on the real estate market and the second is sentiment, which is a product of that interest rate. I don’t think anyone wants to add to the uncertainty just yet.”