RBA holds rates at 0.1 per cent, but no longer ‘prepared to be patient’ as Lowe flags looming hikes

Rates remain unchanged but Reserve Bank governor Philip Lowe has cleared the way for an imminent rate hike.

The Reserve Bank, led by governor Philip Lowe, has held rates steady at 0.1 per cent. Picture: Lisa Maree Williams/Getty Images

Reserve Bank governor Philip Lowe has revealed the central bank board is no longer “prepared to be patient”, revealing a key change in rhetoric that economists say paves the way for a rate hike in June.

Dr Lowe, in a statement accompanying the widely expected decision to hold rates at 0.1 per cent at Tuesday’s board meeting, said that “inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target”.

But the governor emphasised that the RBA was now on a watching brief for a rate rise, as it awaited key consumer price and wage growth figures to confirm the start of monetary policy normalisation.

“Over coming months, important additional evidence will be available to the board on both inflation and the evolution of labour costs,” Dr Lowe said.

“The board will assess this and other incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with the target.”

Crucially, Dr Lowe’s statement this month no longer included the longstanding conclusion that followed recent meetings that “the board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve”.

Central banks will typically prepare the ground for rate hikes through a graduated change in language, in order to reduce the shock on households and financial markets.

CBA senior economist Belinda Allen said Dr Lowe’s reference to “important additional evidence” is consumer price and wages growth data due to be released on April 27 and May 18, and that the governor would “like to see both data points before lifting the cash rate”.

“This suggests that June … is the most likely timing for the first rate hike by the RBA since 2010,” Ms Allen said.

Ms Allen said the March quarter consumer price index would show the RBA’s preferred underlying measure of inflation reaching 3.4 per cent over the year.

“If the data prints in line with our forecast the RBA should have enough confidence to signal at its May meeting that a rate hike is imminent,” she said.

Dr Lowe also flagged, for the first time, that the extraordinary monetary policy measures adopted through the health crisis had largely achieved their goals.

“The board’s policies during the pandemic have supported progress towards the objectives of full employment and inflation consistent with the target. The board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates,” he said.

As economists scrambled to bring forward their rate hike calls, the Australian dollar jumped by as much as 1 US cent to US76.4c, before settling at a 10-month high of just above US76c in late Asian trade. Investors on Tuesday afternoon were pricing in as many as seven rate hikes in 2022 – implying a rate hike a month from June.

Stephen Miller, an investment adviser to the $15.3bn fund manager GSFM, said he doubted Dr Lowe would risk such a rapid pace of rate hikes.

But Mr Miller said “the retirement of the ‘patience’ mantra is an acknowledgment that, like the rest of the developed country complex, inflation in Australia has and will surprise with its magnitude and momentum, even if Australia has a more benign starting point”.

“The RBA wishes to avoid meeting an inflation target by causing a recession, or allowing high and potentially destabilising inflation to persist well into 2023,” he said.

Westpac chief economist Bill Evans said Dr Lowe’s language indicated there was now a clear possibility of a rate rise in June, two months earlier than he had expected.

Mr Evans said the growing prospect of a rate hike immediately after the May election meant Dr Lowe was prepared to thrust the central bank into the middle of a heated political debate.