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Australia’s central bank says omicron won’t derail economic recovery

SYDNEY — The Reserve Bank of Australia left its official cash rate steady at 0.10% at its monthly policy meeting Tuesday, indicating it will be some time before the required conditions for an increase will be in place and addressing concerns about the omicron variant of the COVID-19 virus.

“The emergence of the omicron strain is a new source of uncertainty, but it is not expected to derail the recovery,” RBA Governor Philip Lowe said in a statement. “The economy is expected to return to its pre-delta path in the first half of 2022.”

But even as the economy rebounds in 2022, the central bank’s first rise in interest rates since 2010 appears to be still some way off.

“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range,” Lowe said. “This will require the labor 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.”

Despite the RBA’s cautious guidance, financial markets are pricing in interest rate increases in 2022 and 2023, betting that global inflation pressures will eventually wash into the domestic economy.

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Australia’s resource-rich economy contracted by 1.9% in the third quarter, as more than half its population was forced back into lockdowns due to the rapid spread of the delta variant.

But a fourth quarter recovery is now emerging amid data showing surging employment demand and strong retail sales as consumers return to malls supported by a mountain of household savings built up during lockdowns that stretched for more than three months.

The next meeting of the RBA board will be in February, when it is expected to taper its weekly government bond buying. Some economists expect it will abandon quantitative easing entirely given a rapid recovery in the economy and the emergence of stubborn inflation pressures.

“At its February meeting, the board will consider the bond purchase program, Lowe said.

By mid-February, the RBA will hold a total of 350 billion Australian dollars of government bonds, with these holdings providing significant support to the economy, Lowe said.

In reassessing its QE program, the RBA will consider 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.

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