RBA holds, happy to print MOAR

Today’s statement:

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 3-year Australian Government bonds, as well as the parameters of the Term Funding Facility and the government bond purchase program.

Globally, the news has been mixed recently. On the one hand, infection rates have risen sharply in Europe and the United States and the recoveries in these economies have lost momentum. On the other hand, there has been positive news on the vaccine front, which should support the recovery of the global economy. The recovery is also dependent on ongoing support from both fiscal and monetary policy. Hours worked in most countries remain noticeably below pre-pandemic levels and inflation is low and below central bank targets.

Financial conditions remain accommodative around the world, with bond yields near historically low levels. The positive news on vaccines has boosted equity markets, lowered risk premiums and supported further increases in some commodity prices. The improvement in risk sentiment has also been associated with a depreciation of the US dollar and an appreciation of the Australian dollar.

In Australia, the economic recovery is under way and recent data have generally been better than expected. This is good news, but the recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support. In the RBA’s central scenario, it will not be until the end of 2021 that the level of GDP reaches the level attained at the end of 2019. In the central scenario, GDP is expected to grow by around 5 per cent next year and 4 per cent over 2022.

Employment growth was again strong in October, although the unemployment rate increased to 7 per cent as more people rejoined the workforce. A further rise in the unemployment rate is still expected, as businesses restructure in response to the pandemic and more people rejoin the workforce. The unemployment rate is forecast to decline next year, but only slowly and still to be around 6 per cent at the end of 2022.

The extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years. In the September quarter, the Wage Price Index increased by just 0.1 per cent, to be 1.4 per cent higher over the year. In underlying terms, inflation is forecast to be 1 per cent in 2021 and 1½ per cent in 2022.

The Board views addressing the high rate of unemployment as an important national priority. Its policy decisions over recent months will help here. These decisions are complementary to the significant steps taken by Australian governments to support jobs and economic growth.

The Bank’s policy response has lowered interest rates across the yield curve, which will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets. The Term Funding Facility is also supporting the supply of credit to businesses. To date, authorised deposit-taking institutions have drawn down $84 billion under this facility and have access to a further $105 billion. Over the past month, the Bank has bought $19 billion of government bonds under the bond purchase program and a further $5 billion of Australian government securities in support of the 3-year yield target. Since the start of this year, the RBA’s balance sheet has increased by around $130 billion.

Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time. For its part, 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. Given the outlook, the Board is not expecting to increase the cash rate for at least 3 years. The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.

David Llewellyn-Smith

Comments

  1. WOW. what can you say. they came straight out and said we want a weaker currency. basically, we will print money until the cows come home. subdued wages and prices over ‘coming years’. hardly the inflation storm that markets are discounting,

    • happy valleyMEMBER

      As for weakening the currency, the RBA will likely fail miserably but they will continue to achieve superbly in r.ping savers and depositors?

    • Weaker currency while dependent on overseas goods is the path to imported inflation.
      In the long term it will help encourage our industry to try and manufacture but it also brings with it the inflation.

  2. pfh007.comMEMBER

    “..The Bank’s policy response has lowered interest rates across the yield curve, which will assist the recovery by:

    1. lowering financing costs for borrowers;

    2. contributing to a lower exchange rate than otherwise; and

    3. supporting asset prices and balance sheets…”

    Yes well we know that 1 and 3 are not going to work because of

    APRA!!!!!!
    APRA!!!!!!
    APRA!!!!!!
    APRA!!!!!!

    As for No 2 – well some of us remember when some claimed that anything less than a 2% positive margin to US rates would cause the AUD to collapse.

    No. 2 can only happen if other Central Banks let it happen.

    And they will not because they are playing the same game.

    But hopeless ineffective policy is what makes Australia such a special place so please continue.

  3. happy valleyMEMBER

    The RBA has found themselves a new toy and they won’t be happy until they have worn it out.