Australia's central bank has conceded interest rates may rise this year despite warning future variants prompting a virus surge could still derail the economic recovery.
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Speaking at the National Press Club on Wednesday, Reserve Bank Governor Philip Lowe said earlier changes to current monetary policy settings is "plausible", but warned the recent Omicron outbreak highlighted how sensitive the economy is to the pandemic.
Dr Lowe noted the post-Delta rebound lost steam due to the arrival of Omicron in Australia, which disrupted supply chains and thrusted a significant proportion of the workforce into isolation.
"Prior to Omicron, the economy had established strong positive momentum, bouncing back quickly following the easing of the Delta restrictions," Dr Lowe said in his speech.
"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."
Speculation of an earlier than first thought hike in the cash rate has been circulating following two consecutive quarters of inflation being within or above the RBA's target range of 2 to 3 per cent.
Signaled rate hikes by the market have been touted for later in the year and were further accelerated by movements in the US economy which recorded annual inflation growth of 7 per cent and sparked the Federal Reserve to allude rates may be hiked as early as March.
Dr Lowe said he was dumbfounded the market was pricing a rate rise in Australia similar to the US, given the level of inflation is roughly half.
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"Our inflation is half of that of the US and the labour market is still half of that of the US," he said.
"I still struggle with how the same interest rate reaction is priced in for Australia and the US."
Dr Lowe also said the risk of hyper-inflation remains low and current price inflation levels are being manipulated by supply constraints and a boom in the price fuel which on an annual basis has risen 32 per cent.
"We've got to remember that underlying inflation has only just got to the midpoint of the target point for the first time in seven years," he said. "So I don't think that that requires an immediate response."
The governor warned households will need to implement a financial buffer to cope with a rise in the cash rate which will transcend to higher interest paid on mortgages.
"Interest rates will go up. We need to be prepared for that and people need to have buffers," Dr Lowe said.
The RBA is scheduled to release in minutes from its monetary policy meeting on Friday which will provide in-depth economic forecasts for the year ahead.
During his speech, Dr Lowe unveiled the RBA anticipates the unemployment rate to hit 3.75 per cent by the end of the year, while gross domestic product is forecast to grow at above 4 per cent over 2022.
A prospective rate rise is also underpinned by wage growth which is expected to pick up to 3 per cent by the end of 2023.
Dr Lowe did note an unexpected rise in inflation would prompt earlier action.
"If we're wrong there and inflation does pick up and doesn't come down then we will have to increase interest rates more quickly than I currently think is possible," he said.
"I think this remains to be tested, when interest rates go up, the household sector will be quite responsive to it."
The RBA also outlined its decision to cease its bond buying regime was a step in normalising monetary policy and in part a reaction to other central banks cutting back pandemic measures.
