8th December 2021
“Business opportunities are like buses, there’s always another one coming?” – Richard Branson
Despite an increase in inflation, the Reserve Bank of Australia left monetary policy settings unchanged at its final meeting of the year, pointing to lacklustre progress towards other targets such as wages growth. In his post-meeting statement, RBA (Reserve Bank of Australia) Governor Philip Lowe said the Bank is prepared to be patient regarding the timing of the next rate hike. “The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently,” he said. The RBA has been quite adamant this year that official interest rates would not go up until at least 2024 but rapidly changing fundamentals such as inflation and wages have raised questions as to whether this is now realistic.
Last week, the Organisation for Economic Cooperation and Development (OECD) said that if the inflationary spike persists, it could force the RBA to tighten monetary policy even sooner. But the RBA believes inflation pressures will remain low until wages growth — which lifted to 2.2 per cent over the September quarter — sits well above the 3 per cent mark.
It is hard to believe that the current state of the economy in Australia has never been better even in the face of the worst pandemic in modern times. That said Westpac have lifted their forecasts for GDP (Gross Domestic Product) grow GDP (Gross Domestic Product) for the December quarter of 2.3% to be followed by a growth of 6.4% in 2022. The charts below illustrate the significant increases to GDP forecasts both pre and post Covid and Delta suggesting inflationary pressures may become a concern sooner rather than later.
Depending on who you ask the situation in China remains a little mixed. The recent release of Chinese PMI (Purchasing Managers Index) suggests restrictions to stop the spread of delta have not had a material impact on consumption and business services but the picture with situations like Evergrande remain unclear.
What happens in Australia will to a substantial extent be determined by what happens in the US. At this stage, the US is entering its first phase of monetary policy normalisation setting up the stage for a bump in interest rates.
The RBA will reconvene in February 2022. While a shift in outlook for the cash rate is unlikely, Westpac chief economist Bill Evans said there is a chance it will taper its weekly bond purchases from $4 billion to $2 billion, suggesting we may be edging closer to an eventual slight increase in the official cash rate.
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