RBA expects rates on hold until 2024

DESPITE a big-spending federal budget last week and recent upgrades to the GDP growth outlook, the Reserve Bank of Australia sees only muted inflation risks in the years ahead, likely putting off the need for a rate rise until 2024 “at the earliest.”

In minutes of its May 4 policy meeting published on Tuesday, the central bank said there was little risk of a wages breakout given there was plenty of spare capacity in the job market.

“Despite the strong recovery in economic activity in Australia, wage and price pressures remained subdued,” the RBA said. “A pick-up in inflation and wages growth was expected, but this was likely to be only gradual and modest.”

The RBA is fixed on restoring the economy to full employment over coming years, which suggests the unemployment rate may need to go below 4 per cent, from 5.6 per cent now, and remain there for some time before wages begin to grow and inflation is restored to the central bank’s 2-3 per cent target band.

The dovish outlook comes despite Treasurer Josh Frydenberg last week announcing new spending measures in the budget. Mr Frydenberg said the economy was “roaring” back to life, noting that a soaring iron ore price and a fasterthan-expected fall in unemployment this year had boosted government revenues substantially.

The budget has put government net debt on a trajectory to approach $1 trillion in coming years, or about 40 per cent of GDP. The surge has put a question mark over Australia’s AAA sovereign debt rating, with some expecting an imminent downgrade.

The RBA itself recently upgraded its GDP growth forecasts for the economy in 2021 to 4.75 per cent, up sharply from a figure of 3.5 per cent in February, while employment creation continues to surge.

A number of economists recently lowered their forecasts for unemployment by the end of the year, warning that the RBA’s benign policy guidance might soon be challenged to reflect the pace of the recovery.

Still, the RBA is crunching the numbers on a number of future inflation scenarios.

“Members noted that the extent of spare capacity in the economy at the end of the forecast period was uncertain, which meant the gradual increase in inflation could be slower or faster than envisaged,” the minutes said.

How consumers spend a big increase in household income over the past year could determine the path for inflation and interest rates, it said. “A stronger economic trajectory than the one envisaged in the baseline scenario was possible if households increased spending by more than expected … in this upside scenario, inflation would increase to around 2.25 per cent by mid-2023,” the minutes added.

But the reverse could also eventuate if households chose to retain high levels of savings, the RBA said.

The central bank has flagged it intends to announce key decisions around the future of its quantitative easing program, and its 3-year government bond yield curve control scheme in July.