- Reserve Bank of Australia has maintained a 0.1 per cent cash rate goal and a zero-percentage-point interest rate on Exchange Settlement balances.
- The central bank has also kept the April 2024 bond as the yield target bond, and keep the 0.1 per cent target
- After the present bond purchase programme ends in early September, RBA will continue to buy government bonds at a slightly reduced rate
- RBA reiterated that the conditions to raise the cash rate will not be met before 2024 despite a growing chorus believing they will be forced to raise it earlier
The Reserve Bank of Australia (RBA) has held the cash target at 0.1 per cent, keeping it at record lows, while tweaking its bond purchases.
RBA also announced it will retain the April 2024 bond as the bond for the yield target and retain the target of 0.1 per cent.
The central bank will continue purchasing government bonds after the completion of the current bond purchase program in early September, at a slightly reduced rate.
These purchases will be at the rate of $4 billion a week until at least mid-November, down from $5 billion.
RBA governor Phillip Lowe said in his post-meeting statement that the bond purchase program is playing an important role in supporting the economy.
“The bank will continue to purchase bonds given that we remain some distance from the inflation and employment objectives,” he said.
“However, the board is responding to the stronger-than-expected economic recovery and the improved outlook by adjusting the weekly amount purchased. It will conduct a further review in November, allowing the board to respond to the state of the economy at that time.”
The Term Funding Facility’s final drawdowns were made in late June, with a total of $188 billion being pulled down under this facility.
RBA said this has contributed to a highly liquid banking system in Australia as the facility provides low-cost fixed-rate finance for three years, low borrowing rates will be sustained until mid-2024.
Economic recovery stronger than earlier expected and is forecast to continue
RBA said while the economic recovery in Australia is stronger than earlier expected, it is still to be seen how the recent virus outbreaks and lockdowns will affect recovery.
“But the experience to date has been that once outbreaks are contained and restrictions are eased, the economy bounces back quickly,” Mr Lowe said.
Despite the strong recovery in jobs and reports of labour shortages, Mr Lowe said inflation and wage outcomes remain subdued.
“While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest,” he said.
“In the central scenario, inflation in underlying terms is expected to be 1½ per cent over 2021 and 2 per cent by mid 2023.
“In the short term, CPI inflation is expected to rise temporarily to about 3½ per cent over the year to the June quarter because of the reversal of some COVID-19-related price reductions a year ago.”
Interest rates stay at record lows
As widely expected the central bank has held the interest rate at the record-low levels it reached in November.
The RBA reiterated that the conditions to raise the cash rate will not be met before 2024 despite a growing chorus believing they will be forced to raise it earlier.
RBA said it will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range, which the bank’s central scenario says won’t be met before 2024.
Many however believe that the RBA will be forced to move earlier than 2024.
Commonwealth Bank has predicted rates will rise towards the end of next year, ANZ forecasted rates to rise in late 2023 with Westpac shifting its estimate to March 2023.
AMP Capital’s chief economist Shane Oliver said that while the recovery has been strong there is still a way to go to reach RBA’s conditions for a rate hike.
“In particular wages growth of 3% or more and inflation sustainably in the 2-3% target zone,” he said. “Particularly with coronavirus still causing periodic problems.
“That said, we expect the conditions for a rate hike to be in place by 2023 so anticipate a 2023 rate hike, ahead of the RBA’s own expectations for no rate hike until 2024 at the earliest.”
Out of the 40 experts and economists that took part in Finder’s RBA Cash Rate survey, only five per cent (2/40) believe that the cash rate will increase before the year ends, one in three (13/40) expect an increase to occur in 2022.
There is no expectation from the experts that the cash rate will decrease any time before 2023.
The central bank also reminded lenders that it is keeping a close eye on standards and trends in the housing borrowing market.