The Reserve Bank boss says policymakers are flying into uncharted economic territory, and the RBA will "take the time" to figure out what is going on before raising interest rates.
Speaking at a National Press Club lunch in Sydney, RBA governor Philip Lowe emphasised again that this month's end to the bank's bond-buying program did "not mean that an increase in the cash rate is imminent".
Echoing his post-meeting statement yesterday, Dr Lowe said the Reserve Bank's board would be "patient" before raising the key official interest rate for the first time since November 2010.
One reason for this patience is that Australia's core inflation rate, although at its highest level in more than seven years, is still much lower than other countries that have already raised rates, such as the UK and New Zealand, or are about to, such as the US.
Instead, the Reserve Bank governor strongly implied the RBA would sit on the sidelines for at least a large part of this year.
"As we navigate towards full employment, we have scope to take the time to distil the balance between supply and demand in the economy," Dr Lowe said.
"Over the course of this year, we will be watching how the various supply-side problems resolve and the effects on prices."
However, Dr Lowe admitted that a rate rise was possible this year.
"If things go well, and the economy performs strongly, then there are clearly scenarios where we would be increasing rates later this year if some of the uncertainties are resolved," he said in the question and answer session.
"Because inflation is not that high at the moment, we can wait to see how those uncertainties resolve.
High household debt gives RBA rate breathing space
Perhaps ironically, it is the high indebtedness of many Australian households that gives the Reserve Bank governor comfort that the RBA does not need to raise interest rates quickly.
"The household sector has a lot of debt, so I think that they'll be responsive to an increase in interest rates," he observed.
"So I'm not worried about inflation getting out of control, and this is one reason why the board is prepared to be patient here."
However, Dr Lowe also warned those heavily indebted households that now was the time to save money in anticipation of a rate increase, if they had not already.
"Interest rates will go up, and the stronger the economy, the better progress on unemployment, the faster and the sooner the increase in interest rates will be," he cautioned.
Economists certain 2022 rate hike will come
However, if Philip Lowe was hoping to convince markets and the economists at the big banks that a rate rise was unlikely this year, he did not succeed.
Westpac and the Commonwealth Bank were both forecasting the first rate increase in August ahead of Wednesday's speech, and CBA's head of Australian economics Gareth Aird has not changed his view.
"The RBA's forecasts and the governor's narrative don't quite marry up," Mr Aird said, noting that the Reserve expects inflation to be at the top half of its target range this year and next.
"Throughout the COVID-19 pandemic there has been a familiar tone and theme emanating from RBA communication. Put simply, the RBA has sounded as dovish as is credibly possible on the inflation outlook and the outlook for the cash rate at every given chance.
KPMG senior economist Sarah Hunter was a little more believing of Philip Lowe's comments, but still predicted rates would rise this year.
"I think it is more likely to be the November meeting, or certainly towards the end of this year," she told ABC News Channel.
"My reasoning for that is that on that point about waiting and waiting to see how the data plays out and making sure that it's a sustainable move in inflation and not inflation that is related to conditions that will unwind."
While some big bank economists, such as ANZ, are tipping that the cash rate could end up back above 3 per cent over the next few years, Ms Hunter feels that is unlikely.
"Winding the clock all the way back to the GFC and before, it wasn't unusual for the cash rate to be comfortably above 5 per cent," she noted.
"I don't think we'll see anything like that. If we are getting up to the 2-2.5 per cent mark that may be the of the cycle, maybe even before then.
Focus on jobs and wages
One key focus for the Reserve Bank is wages growth, which it has consistently said needs to be comfortably above 3 per cent to keep inflation "sustainably" within its 2-3 per cent target range.
The most recent ABS wage price index was languishing at 2.2 per cent, which Dr Lowe said was higher than forecast, but not as much higher as inflation and economic growth, nor the matching the sharp drop in unemployment.
"Wages growth has picked up as well, but it has only just returned to the rates prevailing prior to the pandemic," he observed.
"This inertia stems from multi-year enterprise agreements, the review of award wages that takes place on an annual basis, and public sector wages policies.
"Our central forecast is for the wage price index to increase by 2.75 per cent this year and 3 per cent over 2023. Broader measures of labour costs, which also matter for inflation, are expected to be growing at a faster rate than this."
However, Dr Lowe said the bank was entering uncharted territory in forecasting wages growth because Australia had not experienced an unemployment rate below 4 per cent in about 50 years, which is what the RBA expects to see later this year.
"We have no contemporary experience as to how labour costs will evolve in a world where the national unemployment rate is below 4 per cent," he explained.
"We do know, though, that wages growth remained modest a number of years ago when the unemployment rates in New South Wales and Victoria were temporarily around 4 per cent."
