The omicron wave has created significant short term challenges for the economy, with both consumer confidence and domestic supply chains taking a knock. But as has been seen in other parts of the world, the impact is likely to be temporary and the economy will be able to bounce back; domestic supply chain challenges are already easing (although they remain stretched), and the weekly consumer confidence and spending indices are now recovering.

The policy settings remain very supportive. Traditional fiscal supports (spending on infrastructure, the increase in the instant asset tax write-off for businesses, additional government spending on healthcare etc) are still feeding through and although market rates have risen and there is increased volatility, monetary conditions remain relatively loose. Together with further increases in consumer spending, that are likely to materialise as people become used to living with COVID, the outlook for growth this year remains brisk.

With economic activity and employment now pushing beyond pre-COVID levels (meaning the spare capacity in the economy has largely been absorbed), domestic inflationary pressures are building, as highlighted in the latest CPI data for Q4 2021. While some of the contributions to headline inflation will ease (particularly fuel, where the pace of increase is already moderating), core inflation has picked up and is likely to run further. Wage increases are now driving rises in the cost of home construction, childcare and gardening services amongst others, and many businesses are reporting that they will have to raise their final output prices in response to significant increases in their cost base.

Given the current position of the economy, it is appropriate for the RBA to move decisively away from the emergency pandemic settings - they have done their job and are no longer needed - and back towards ‘business as usual’. It would be appropriate for the RBA to end its QE program in the very near term, and to begin raising the cash rate in the second half of 2022.