3 takeaways after the RBA left monetary policy unchanged

The Reserve Bank of Australia (RBA) has left the monetary policy unchanged at its January meeting. Investors bought the Australian dollar at the start of the new trading month, as reflected by the AUD/USD pair trading well above the 0.70 support area. 

This week, the first central bank to release its monetary policy was the Reserve Bank of Australia, or RBA. It left the official cash rate at 0.1%, its lowest boundary, despite inflation picking up faster than the central bank had expected.

Because the market did not expect a hike from the RBA, the statement did not impact the Australian dollar. Instead, traders focused more on the message, or forward guidance, that the RBA sent.

Nevertheless, despite the RBA keeping financial conditions loose, the Australian dollar bounced from its recent lows. For example, the AUD/USD exchange rate bounced from support seen in the 0.7 area and now threatens to move above 0.71.

Here are three takeaways from the RBAs message to the markets:

• Omicron did not derail the economic recovery
• The Australian labor market remains  strong
• Inflation picked up faster than the central bank expected

Omicron did not derail the economic recovery

Omicron affected economies worldwide as the new COVID-19 variant spreads faster, and thus people called in sick and stayed home to recover. As such, the economic output in the last several weeks was affected.

However, the RBA’s view is that the omicron variant did not derail the economic recovery and forecasts a GDP growth of a little over 4% in 2022.

The Australian labor market remains strong

The central bank sees a strong labor market ahead, with further gains in the months ahead. Because of the high number of jobs vacancies, the RBA sees potential for further improvements in the period ahead. As a side note, the unemployment rate in Australia settled at 4.2% last December.   

Inflation has picked up faster than the RBA expected

One of the side effects of the COVID-19 pandemic is higher inflation. Inflation has picked up in the advanced economies, and Australia is not immune to it.

Rising inflation took the RBA by surprise. The central bank did expect the prices of goods and services to increase, but they did so more quickly. However, it remains lower than in many other countries and close enough to the 2%-3% target range that defines the RBAs definition of price stability.