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Cash rate on hold

The official interest rate will remain at its record low of 0.1 per cent, where it’s sat since November 2020, the Reserve Bank decided at its March meeting on Tuesday.

Most economists, however, expect that it will start to rise later this year or early in 2023 in response to rising inflation, which is likely to be fueled by the Russian invasion of Ukraine.

The Reserve Bank board acknowledged that the Ukraine conflict has already pushed up prices of many commodities, highlighting continuing uncertainty around supply chains and global energy markets, but said it was too early to conclude that inflation is sustainably within the Bank’s target range of 2 to 3 per cent.

The RBA had forecast underlying inflation of around 3.25 per cent by mid-2022 and had indicated that it wanted to see substantial wages growth before it would support an interest rate rise.

The latest Consumer Price Index figures show it rose by 3.5 per cent over 2021, and is likely to continue its steady climb. That is set to be further affected by the Russian invasion of Ukraine, with both countries together producing nearly 30 per cent of the world’s wheat exports. Wheat prices have already jumped more than 5 per cent since the invasion.

The Australian Wage Price Index, however, sits at 2.3 per cent for the year, which represents a fall in real wages of 1.2 per cent. At the Reserve Bank’s last meeting in February, members said they expected a pick-up in wages growth in response to the tightening of the labor market, but that there was still too much uncertainty around the response of labor costs to low levels of unemployment and the reopening of the international borders.

While the prospect of rate rises this year may strike fear into the hearts of many debt-laden households, the timing is still far from certain.

“So much of the current inflationary pressures appear to be transitory and supply-driven so even if the Bank decided to raise rates sooner rather than later, that wouldn’t do anything to cut inflation but it might risk harming the economic recovery.

For home-buyers the prospect of a slow, gradual rate rise might not be all doom and gloom. It will lead – and is leading – to slower price gains and could even end up in price falls in the future.


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