Is the RBA's latest cash rate decision justified?


  • RBA’s decision to keep the cash rate at ten basis points did not come as a surprise.
  • The Omicron variant is the new source of uncertainty for the RBA, which could hamper the economy’s strong rebound.
  • Now that the RBA has again shot down early rate hike expectations, a lot is riding on the February 2022 meeting.

Despite record-breaking growth in the housing market, the Reserve Bank of Australia (RBA) recently kept the nation’s interest rate unchanged at the record low level. The firmer Wage Price Index and the recent weakness in inflation numbers seem to have prompted the policymaker to retain the status quo. Meanwhile, as the Big Four banks have jacked up their fixed rates, the RBA’s latest decision appears questionable.

RBA has kept cash rates stagnant for over a year now

While the decision to maintain the cash rate at ten basis points was not a surprise, RBA’s cryptic announcement regarding the rate hike left experts longing for more clarity. The December policy meet was supposed to bring down the murkiness of where the economy is headed, especially in terms of the lending market. Instead, the RBA continued its pattern of tiptoeing around the subject and gave little, if not nothing, to clear these doubts.

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What do market experts predict?

Speculations are rife that the central bank can embrace rate hikes as soon as next year after improved labour market conditions are reflected in wages growth. Rising inflation numbers and the earlier-than-expected rate hike by Fed may also convince the central bank to tighten its monetary policy. However, the Omicron variant is the new source of uncertainty for the RBA, which could hamper the economy’s strong rebound while pushing back interest rate increases to 2023 and beyond.

Clarity on the new COVID-19 variant is likely to seep in with passing months as the Australian economy grapples with changing headwinds. Subsequently, all expectations have now shifted to the February 2022 meeting, which would be the year’s first meeting and the continuation to this month’s meet as there is no monetary policy meeting scheduled for January.

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Reading between the lines

Experts have dug deeper into the recent monetary policy announcement to understand the tone underlining RBA Governor Phillip Lowe’s message. Governor Lowe removed the year 2023 from a key statement within the announcement that discussed the possibility of a cash rate hike. Experts have taken this small change in the Governor’s speech as a hint that the RBA might be planning on revising its expectations further.

The market seems to be in a rush to hear about a cash rate hike

As reiterated by economic experts, the economy is well within the target inflation band of 2-3%. Considering the scenario, upward pressure could build upon interest rates either by the RBA or banks themselves. Despite varying pressures due to supply constraints and rising Omicron cases, a rise in fixed rates could be followed by a cash rate hike in late 2022.

Briefly, a lot is riding on the February 2022 meeting after the RBA has again shot down early rate hike expectations. Experts have somewhat grown tired of the RBA’s policy of beating around the bush amid improving wages and rising inflation levels. Thus, the market appears to be headlong to hear a decision on the matter.

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