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Highlights
- Expectations are building up for the upcoming RBA monetary policy meet surrounding the quantitative easing measures.
- The last two months of 2021 have demonstrated strength in economic data.
- An interest rate hike is unlikely to be announced in tomorrow’s meeting.
The Reserve Bank of Australia (RBA) is all set to host its first monetary policy meet of the year tomorrow, i.e., 1 February 2022. Some major expectations have been built up for the upcoming meet, specifically surrounding the quantitative easing measures of the central bank. Meanwhile, speculations are rife that the central bank could announce revisions to the inflation forecast in the upcoming meeting.
Overall, the central bank is likely to be more hawkish than general and expected to devise a path towards tightening measures. It is worth noting that economics and experts have long been anticipating monetary policy to tighten in Australia amid rising inflation and strong economic growth. One can expect the RBA to provide increased clarity on its monetary policy approach.
ALSO READ: Australia records another quarter of high inflation
Saying goodbye to the bond-buying program
One of the prime forecasts for the February meeting is that the bond-buying program, which was announced by the RBA to pump additional money into the economy during the pandemic, could be scrapped. This expectation has been framed over Governor Phillip Lowe’s last month statement, indicating an improvement in economic data could prompt the central bank to terminate its AU$350 billion bond-buying program.
Interestingly, economic data for the last two months of 2021 has broken all records. This might give the RBA a perfect ground to establish policy changes. Specifically, the unemployment rate for December 2021 dropped to 4.2%, a level unseen in 13 years. Meanwhile, the country saw a spike in international travel towards 2021 end.
At the same time, annual core inflation has been sliding upwards, reaching a seven-year high of 2.6% in the December quarter. Not only in Australia but rising inflation has become a pressing issue across the globe. Several nations are resorting to interest rate hikes to cope with inflationary pressures. However, Australia still stands on somewhat ambiguous grounds with regards to this matter.
Will RBA bow before inflationary concerns?
Despite the RBA pivoting towards a more hawkish tone over recent months, an interest rate hike is less likely to be announced anytime soon. While economists and experts have time and again anticipated a cash rate hike by 2022 end, there seem minimal chances of such an announcement to be made in February.
Additionally, 10-year Treasury yields on Australian bonds are steadily increasing, making the scenario more volatile for equity investments. Given the scenario, the share market may not respond well to the hawkish expectations from the central bank.
In a nutshell, the RBA would most likely dismiss a rate hike tomorrow on the grounds of wages growth being lower than its set target. Even though inflation levels have been peaking with each passing month, the RBA is expected to wait for wages growth to catch up before it embraces an interest rate hike. But most importantly, the economy is coming closer to a situation, wherein a rate hike might be the RBA’s last resort.
ALSO READ: Should global markets worry over Fed’s interest rate plans?
