It has also now scrapped all of the emergency economic measures it took to deal with the pandemic. The last, the bond purchasing program that was designed to pump billions of dollars into the economy during the pandemic, will end on February 10.
And it has revised down its forecasts on unemployment with the expectation that it would now fall below 4 per cent. It has also revised up its inflation forecasts and admitted that it had risen quicker than expected, but that it would ease next year.
The ANZ Bank said following the announcement that the official cash rate, which is currently 0.1 per cent, would likely to climb in September and would be 0.75 per cent by November and 2 per cent by the end of 2023.
Its decision to hold firm on interest rates forced a downturn in the Australian dollar while the ASX 200 jumped about 40 points on the announcement.
Sluggish wages growth now appears to be the central issue for the RBA and the main reason the cash rate has not lifted.
RBA Governor Philip Lowe said household and business balance sheets were ”in generally good shape” and the main source of uncertainty was the pandemic.
It said wages had improved but were still only at levels they were before the pandemic although it expected gradual growth as the labour market tightened.
Economist Warren Hogan said the era of unconventional monetary policy in Australia was officially over.
“Today marks the end of quantitative easing and forward guidance. The term funding facility and yield curve control programs were ended last year,” Hogan said.
“We are back to normal operating conditions where all the focus is what they do with the cash rate.”
The RBA said a source of uncertainty was the persistence of the disruptions to supply chains.
Former Howard Government Treasurer and now Future Fund chair Peter Costello has warned of challenging times ahead for investors as interest rates rise around the world, including in Australia.
“It has been an exceptionally good year,” Costello said.
“The Future Fund profited from the fact that monetary policy was very expansionary both in terms of interest rates and in terms of quantitative easing and that increased asset prices very significantly.”
However, he said looking ahead, inflation and interest rates were rising and quantitative easing would be coming to an end, which had already seen an adjustment in asset prices on stock exchanges around the world in January.
“We would expect you’ll see a lot of adjustment, a lot of recalibration as a consequence of rising interest rates and the end of what were exceptionally easy monetary conditions over the year ahead,” Costello said.
“Which means we have to position for challenging times if we are to make sure that we can confront the outlook over the next year or two, which will be a lot more challenging for investors.”