The Reserve Bank of Australia held interest rates at an all time low on Tuesday to just 0.1% as widely expected. RBA remains committed to maintaining highly supportive monetary conditions until its goals are achieved. RBA later in the year will consider whether to retain April 2024 bond as target bond.
The Reserve Bank of Australia held interest rates at an all time low on Tuesday to just 0.1% as widely expected. RBA remains committed to maintaining highly supportive monetary conditions until its goals are achieved. RBA later in the year will consider whether to retain April 2024 bond as target bond.
RBA Cutting & Printing
Highlights
- Cash rate cut maintained at 0.1%
- 3-year bond yield target at 0.1% Government bond buying programme to buy government bonds of 5 to 10 years maturity
- Interest rate on new drawings under the Term Funding Facility to 0.1 per cent
- Interest rate on Exchange Settlement balances to zero
- Purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.
- Under the program to purchase longer-dated bonds, the Bank will buy bonds issued by the Australian Government and by the states and territories, with an expected 80/20 split.
- These bonds will be bought in the secondary market through regular auctions, with the first auction to be held this Thursday for Australian Government securities. Further details of the auctions are provided in the accompanying market notice.
- RBA later in the year to consider whether to retain the April 2024 bond as the target bond or to shift to the next maturity
- Rollout of vaccines is supporting the recovery of the global economy
- Recovery remains uneven, there are still uncertainties to the outlook
- Australian economic recovery is well under way and stronger than expected
- Wage, price pressures are subdued and expected to remain so for some years
- Underlying inflation is expected to remain below 2% over the next few years
- RBA prepared to undertake further bond purchases if necessary
- RBA will not increase cash rate until inflation hits target range of 2% to 3%
- Does not expect such conditions to be met until 2024 at the earliest
Statement by Philip Lowe, Governor: Monetary Policy Decision
Number 2021-04 Date 6 April 2021
At its meeting today, the Board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility and the government bond purchase program.
The rollout of vaccines is supporting the recovery of the global economy, although the recovery is uneven. While there are still considerable uncertainties regarding the outlook, the central case has improved. Global trade has picked up and commodity prices are mostly higher than at the start of the year. Inflation remains low and below central bank targets.
Sovereign bond yields have increased over recent months due to the positive news on vaccines and the additional fiscal stimulus in the United States. Inflation expectations have also lifted from near record lows to be now closer to central banks’ targets. The 3-year government bond yield in Australia is at the Board’s target of 10 basis points and lending rates for most borrowers are at record lows. The Australian dollar remains in the upper end of the range of recent years.
The economic recovery in Australia is well under way and is stronger than had been expected. The unemployment rate fell to 5.8 per cent in February and the number of people with a job has returned to the pre-pandemic level. GDP increased by a strong 3.1 per cent in the December quarter, boosted by a further lift in household consumption as the health situation improved. The recovery is expected to continue, with above-trend growth this year and next. Household and business balance sheets are in good shape and should continue to support spending.
Nevertheless, wage and price pressures are subdued and are expected to remain so for some years. The economy is operating with considerable spare capacity and unemployment is still too high. It will take some time to reduce this spare capacity and for the labour market to be tight enough to generate wage increases that are consistent with achieving the inflation target. In the short term, CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions. Looking through this, underlying inflation is expected to remain below 2 per cent over the next few years.
Housing markets have strengthened further, with prices rising in most markets. Housing credit growth to owner-occupiers has picked up, with strong demand from first-home buyers. In contrast, investor credit growth remains subdued. Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.
The Board remains committed to the 3-year government bond yield target of 10 basis points. Later in the year it will consider whether to retain the April 2024 bond as the target bond or to shift to the next maturity. The initial $100 billion government bond purchase program is almost complete and the second $100 billion program will commence next week. Beyond this, the Bank is prepared to undertake further bond purchases if doing so would assist with progress towards the goals of full employment and inflation. Authorised deposit-taking institutions have drawn $95 billion under the Term Funding Facility and have access to a further $95 billion. Since the start of 2020, the RBA’s balance sheet has increased by around $215 billion.
These various monetary measures are continuing to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets. Together, monetary and fiscal policy are contributing to the recovery in aggregate demand and the pick-up in employment.
The Board is committed to maintaining highly supportive monetary conditions until its goals are achieved. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.
Source: RBA
From a Sunburnt Country