Reserve Bank governor Philip Lowe says Australia is closer to full employment and achieving the inflation target then he had anticipated, but has reiterated the central bank will remain patient before lifting the cash rate.
Dr Lowe addressed the National Press Club on Wednesday, the day after the RBA's first board meeting of the year where it left the cash rate at a record low 0.1 per cent and ended its $350 billion bond buying program.
"I recognise that in a number of other countries the ending of the bond purchase program has been followed closely, or is expected to be followed closely, by an increase in the policy rate," Dr Lowe said on Wednesday.
"While inflation has picked up in Australia, it remains substantially lower than the seven per cent rate in the United States, 5.4 per cent in the United Kingdom, and 5.9 per cent in New Zealand."
It has also not been accompanied by strong wages growth as is the case in the US and the UK.
"These are important differences. Our lower rate of inflation and low wages growth are key reasons we don't need to move in lock step with others," he said.
He expects wages growth in Australia to reach to 2.75 per cent this year and three per cent over 2023, compared with just 2.2 per cent currently.
"As I have said on previous occasions, the board will not increase the cash rate until inflation is sustainably within the two to three per cent range."
Even so, he admitted the RBA does not have a specific definition as to what "sustainably in the target range" means.
"The actual rate of inflation is relevant as are the trajectory and the outlook. So too is the breadth of price increases and the factors driving them," he said.
"Based on the evidence we have, it is too early to conclude that inflation is sustainably in the target range."
He said the economy has performed significantly better than he expected, despite the setback of last year's Delta outbreak.
But he said one source of ongoing uncertainty is the possibility of further virus outbreaks, with the Omicron variant being a reminder of such risks.
"Prior to Omicron, the economy had established strong positive momentum, bouncing back quickly following the easing of the Delta restrictions," Dr Lowe said.
"This momentum wasn't sustained into the new year, with Omicron leading to many people having to isolate, interrupting supply chains and affecting spending as people sought to limit their activities."
Even so, he expects the economy will grow in the March quarter.
He expects the unemployment rate to decline to around 3.75 per cent by the end of this year and be sustained at around this rate during 2023.
"If this comes to pass, it would be a significant achievement. The last time we had the unemployment rate below four per cent was in the early 1970s," he said.
