Australia Central Bank Ends Key Pandemic Program

Elevated inflation is driving many central banks to end emergency policies put in place during the pandemic. The Bank of England raised interest rates in December while the Bank of Canada recently signaled rate increases are on the horizon. Last week, Federal Reserve Chairman Jerome Powell said the central bank was ready to raise interest rates at its March meeting and could continue to lift them faster than it did during the past decade.

“Faster-than-expected progress has been made towards the RBA’s goals and further progress is likely,” RBA Governor Philip Lowe said. “In these circumstances, the board judged that now was the right time to end the bond-purchase program.”

Economists expect this to pave the way for the central bank to raise interest rates for the first time in more than a decade. The benchmark cash rate has been at a record-low 0.10% since November 2020, when the bank aggressively loosened policy to cushion the impact of Australia’s pandemic lockdowns and border closures.

Market bets that the RBA will raise interest rates in 2022 increased ahead of Tuesday’s meeting after October-December data showed core inflation up 1.0% from the previous quarter and 2.6% from a year earlier, the latter easily beating the expected 2.3%.

Mr. Lowe sought to damp such speculation. “Ceasing purchases under the bond-purchase program does not imply a near-term increase in interest rates,” he said.

Labor shortages and supply-chain disruptions are driving up prices in Australia as they are elsewhere. Those challenges have worsened as the Omicron variant of Covid-19 has spread quickly across the country’s eastern states—where most Australians live—since authorities reopened the national border late last year and lifted some other restrictions. Cumulative Covid cases have risen more than five this year to 2.61 million, according to the University of Oxford’s Our World in Data project.

Woolworths Group Ltd. , Australia’s largest supermarket operator, has blamed empty store shelves and delays to customers’ grocery deliveries on staff absences because of Covid.

“Unlike the surge buying of early 2020—who could forget the toilet paper—this is because of the number of people in our supply chain in isolation, from suppliers to truck drivers and distribution-center team members, which in turn is causing material delays to store deliveries,” Chief Executive Brad Banducci wrote in a Jan. 6 email to customers.

Abseentism is also affecting the mining sector that produces many of Australia’s biggest exports. Whitehaven Coal Ltd. recently raised cost estimates for coal production by around 10%, partly due to an increase in the number of workers self-isolating.

For the RBA, the challenge is distinguishing inflationary headwinds that will be transitory from those that will persist. The central bank also wants to see a sustained pickup in wage growth and is concerned about Omicron’s impact on household consumption. Retail sales in December recorded the largest monthly fall since April 2020.

In its updated forecasts on Tuesday, the RBA said underlying inflation is likely to rise to around 3.25% in coming quarters, before declining to around 2.75% during next year.

“One source of uncertainty is the persistence of the disruptions to supply chains and distribution networks and their ongoing effects on prices,” Mr. Lowe said.

Write to James Glynn at [email protected] and David Winning at [email protected]