The pandemic continues to impact the outlook with Omicron sweeping across the world. Research suggests Omicron is milder than Delta, vaccines still provide a high degree of protection against severe illness, but high transmission is testing hospital capacity and supply chains. The ‘upside’ is Omicron is likely to peak soon. Omicron will clearly slow Q1 activity but is unlikely to derail the recovery.
- RBA view: NAB maintains its call of the RBA ending QE in February. Our rates call remains mid-2023, but with a relatively aggressive hiking cycle to 1.75-2.0% by the end of 2024 given the RBA is purposefully being behind the curve by waiting until inflation is sustained at 2-3% with wages growth at 3% plus a key input. We expect high near‑term inflation prints to see markets continue pricing in the risk of the RBA hiking earlier (first hike is fully priced by July 2022). NAB still sees the timing of RBA rate rises as in 2023, not 2022.
- QE decision: Three QE options were given back in December: (1) one further taper in February with QE ending in May; (2) a taper in February with QE reassessed in May; or (3) ending QE altogether in February. Governor Lowe noted the RBA’s November SoMP forecasts were consistent with one further taper and given the outperformance of the economy relative to the November forecasts, the decision for the upcoming RBA meeting is really about whether to end QE in February, or May.
- In making the decision February vs. May, the RBA noted that “the December quarter CPI and how the labour market had performed over December and January” will be key determinants, and by February any “risk to the recovery posed by the Omicron variant would also be more apparent by that time”.
- December jobs: For the labour market, the unemployment rate even before December was sitting at 4.6%, ahead of the RBA’s expectation of unemployment reaching 4.5% by June 2022. For December we see the unemployment rate falling further to 4.4%, which would see unemployment at its lowest level since October 2008. Note these figures pre-date Omicron, though if Omicron peaks relatively soon, minimal lasting disruption is likely given unprecedented labour demand as seen in job ads.
- Q4 CPI: For Q4 CPI NAB sees a trimmed mean inflation print of 0.8% q/q and 2.5% y/y, above the RBA’s November forecast of 0.6% q/q and 2¼% y/y. While we are going with 0.8% it could be lower, though we see little scope for a number less than 0.7%. While this adds to our view of the RBA ending QE in February, for cash rate guidance the RBA is likely to continue to wait until wages growth is closer to 3% plus.
- The RBA also noted as part of its QE decision it would also be looking at “the actions of other central banks” and “bond market functioning”. Governor Lowe highlighted the major rationale for QE was to put downward pressure on the exchange rate given other central bank QE programs. On this it is worth noting the US Fed has already announced it intends ending its QE program by March 2022.
Chart 1: Omicron looks to be peaking in the UK, has already peaked in South Africa and may soon start to peak in Australia
Chart 2: Unemployment to fall below the RBA’s forecasts