If there is one date that you should circle to work out what 2022 will look like, it is 1 February.
That is the day Reserve Bank of Australia’s board meets for the first time this year and there is a wide disagreement about what the decision is likely to be on that day.
Around half of the economists surveyed believe the RBA will take the first major step towards raising official interest rates by scrapping quantitative easing with the end of government bond purchasing.
The rest of economists believe the RBA will start to taper its bond purchases – which are running at $4 billion a week – with an eye to stopping them entirely by around May.
That lack of predictive certainty shows what truly unusual times we live in, with the twists and turns in the fight against COVID-19 being a true X-factor that can really step up and change things in a very short period of time.
Last minutes pointed to a tapering of bond purchases
The RBA’s last minutes from its December meeting pointed to the bank tapering its bond purchases, but a lot has happened since then – most notably the international chaos wreaked by the Omicron variant, which rapidly changed the Christmas holiday season.
You would expect that any economic dislocation that caused would perhaps cause the RBA board to reconsider pulling back on stimulus and leaving bond purchases in place but the countervailing pressure comes from the rise in inflation – a factor that has hit with particular force in the United States but is also making itself known in Australia.
Keeping the stimulus flowing for too long with your eyes fixed on COVID-19, while the inflation genie has well and truly escaped from the bottle looms as one of the biggest dangers for central banks in 2022 and it is one that the RBA will be well aware of.
Jobs market already firing, with inflation threatening
The numbers already released show the danger with the jobs market flying, adding an amazing 366,100 jobs in November and unemployment falling to just 4.6% from 5.2% after virus restrictions were largely lifted.
Those restrictions have since been re-imposed to varying extents so the interplay between the economy and the virus remain complex and the stakes for getting it wrong remain high.
So far RBA Governor Philip Lowe has remained quite sanguine about the chances for inflation getting out of control and is still projecting official interest rates to remain where they are until late in 2023.
The market disagrees and is factoring in rising interest rates from the middle of 2022, while other central banks are already lifting rates, such as New Zealand and the Bank of England.
Even the US Federal Reserve has doubled the pace of its tapering and indicated it’s likely to raise rates at a faster pace this year.
Inflation results on 25 January important
That makes the quarterly inflation numbers which are released on 25 January particularly important to the RBA board’s decision, along with policy actions such as the return or otherwise of foreign students or immigrants into the economy.
More workers mean less pressure on wage rises, with Dr Lowe being particularly focussed on the pace of wage rises as one of the metrics that will feed into interest rate rises.
At the moment, wages rose by 2.2% in the year to the September quarter and were still only rising by an annualised 2.4% in that quarter itself.
So, any decisions which slow down the arrival of more workers will tend to raise the pace of wage rises, while a faster number of arrivals will subdue the pace of wage rises.
There are a lot of moving parts and it is important not to assume that because something is happening in the US or other major economies that it will flow through to Australia.
It is certainly possible that we could see a rise in US interest rates well before they happen here – along with a consequent rise in the US dollar as money travels to get higher returns.
All of which means the RBA board decision on 1 February could be a watershed in Australian monetary policy – a time when the high tide mark for low interest rates was reached and the tide of monetary stimulus began to recede.