Lowe Says Some RBA Scenarios Show 2024 Rate-Hike Conditions

The Reserve Bank of Australia’s requirements for raising the benchmark interest rate could be met in 2024 in some of the scenarios the bank has reviewed, but not in others, Governor Philip Lowe said.

The RBA will look at the scenarios again at its meeting next month when it makes its decision on whether to extend its three-year yield target, Lowe said in a wide-ranging speech Thursday.

He pointed out that the target was introduced during an “exceptional period.” Yet later in his address he noted little sign of stronger wage growth and faster inflation in the economy.

“For inflation to be sustainably in the 2–3% range, wage increases will need to be materially higher than they have been recently,” the governor told an Australian Farm Institute Conference in Toowoomba, Queensland. “This still seems some way off.”

The Australian dollar was little changed in response to the speech, trading at 76.15 U.S. cents at 10:42 a.m. in Sydney, though the November 2024 bond yield edged higher.

Most economists expect the board will opt against rolling over the yield-target bond to November 2024 from the current April 2024 maturity, preferring instead to maintain a version of quantitative easing. The RBA board will also need to factor in Federal Reserve officials speeding up their expected pace of policy tightening.

Lowe today reiterated comments from the central bank’s June minutes released Tuesday that the RBA would keep a version of its QE program. He also restated the options set out in the minutes.

“The RBA’s bond purchase program is one of the factors underpinning the accommodative conditions necessary for our economic recovery,” he said. “It is premature to be considering ceasing bond purchases.”

On the decision about rolling over the yield target, Lowe said the “central issue” is the probability of the cash rate increasing over a three-year window.

The governor also reviewed the strength of the labor market. The RBA is trying to drive unemployment down toward 4% in order to drive pay gains and rekindle consumer-price growth.

But employers are loath to raise wages in an uncertain environment and are looking for other avenues to deal with labor shortages, including rationing production.

©2021 Bloomberg L.P.

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