The Reserve Bank of Australia has opted to sit tight on a cash rate of 0.1% through the festive season, even as runaway house prices continue to surge, and the market starts pricing in premature interest rate bumps.
After the central bank's monthly meeting on Tuesday, RBA Governor Philip Lowe drew the curtain on 2021 with a familiar refrain: the cash rate will remain unchanged, and the bank will continue to buy $4 billion in government bonds a week until mid-February.
He said that even though the arrival of the Omicron strain of COVID-19 has given the market a "new source of uncertainty", it isn't expected to derail the Australian economy, as leading indicators continue to point to a strong recovery in the labour market.
"Job advertisements are at an historically high level and there are reports of firms finding it difficult to hire workers. Wages growth has picked up but, at the aggregate level, has only returned to the relatively low rates prevailing before the pandemic," Dr Lowe said.
"A further pick-up in wages growth is expected as the labour market tightens. This pick-up is expected to be only gradual, although there is uncertainty about the behaviour of wages as the unemployment rate declines to historically low levels."
Governor Lowe was coy on inflationary pressures, which he admitted had increased, but still fell shy of the the bank's target band of between 2% and 3%, signalling that it could take a substantial bumper for the bank to consider lifting rates in the early months of next year.
"Inflation has increased, but, in underlying terms, is still low, at 2.1%. The headline CPI inflation rate is 3% and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions in global supply chains," Dr Lowe said.
"A further, but only gradual, pick-up in underlying inflation is expected. The central forecast is for underlying inflation to reach 2.5% over 2023," he said.
"The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.
"This is likely to take some time and the board is prepared to be patient."
The market, though, is betting it'll come far sooner. Some funds have started pricing in a rate hike as soon as March next year, while some of the big four banks in Australia, too, have begun making minor adjustments to their fixed interest rate loans.
The Commonwealth Bank of Australia, which has the largest share of Australia's home loan lending market, hiked interest rates on both owner-occupier and investor home loans by 0.30% and 0.60% respectively last month. It was the third bump in six weeks.
The general market consensus is that a 15-basis-point rate rise could come into play around May next year, with a chance of a further three incremental rate rises before the year is out.
That optimism has so far been fuelled by strong wages data, bloated household spending, and stronger business confidence over the last few months.
Sarah Hunter, chief economist for BIS Oxford Economics, said if a rate hike doesn't come next year, it will almost certainly come in 2023.
"Assuming the impact of omicron and other possible variants is limited the data does suggest that rate rises will be warranted in early 2023," Hunter said.
"Although aggregate wages growth has not risen sharply there has been a step up in private sector wages, and given the tightness of the labor market this will continue," she said.
Dr Lowe acknowledged that house prices have been on a barnstormer of a run over the past year, but said that the rate of increase had started to taper.
The prediction came shortly after the Australian Bureau of Statistics released new figures showing that residential prices were up 5% through the September quarter, and are on track to be up 21.7% for the whole year.
"Housing credit increased by 6.7% over the past year, but, more recently, the value of housing loan commitments has declined from high levels," Dr Lowe said.
"With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers."
Heading into the new year, Dr Lowe said he expects the bank to hold ??$350 billion worth of bonds issued by Australian governments come February, when the central bank undertakes a review of the program.
"In reaching its decision in February, the board will be guided by the same three considerations that it has used from the outset of the program: the actions of other central banks; how the Australian bond market is functioning; and, most importantly, the actual and expected progress towards the goals of full employment and inflation consistent with the target," Dr Lowe said
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