RBA delays taper

RBA governor Phil Lowe today delivered the Bank’s Monetary Policy Decision, which as expected delayed the taper of bond purchases. Lowe also reiterated that the cash rate will not rise until higher inflation is observed, which will require “materially higher” wage growth than currently:

At its meeting today, the Board decided to:

  • maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent
  • maintain the target of 10 basis points for the April 2024 Australian Government bond
  • purchase government securities at the rate of $4 billion a week and to continue the purchases at this rate until at least mid February 2022.

Prior to the Delta outbreak the Australian economy had considerable momentum. GDP increased by 0.7 per cent in the June quarter and by nearly 10 per cent over the year. Business investment was picking up and the labour market had strengthened. The unemployment rate had fallen below 5 per cent and job vacancies were at a high level.

The recovery in the Australian economy has, however, been interrupted by the Delta outbreak and the associated restrictions on activity. GDP is expected to decline materially in the September quarter and the unemployment rate will move higher over coming months. While the outbreak is affecting most parts of the economy, the impact is uneven, with some areas facing very difficult conditions while others are continuing to grow strongly.

This setback to the economic expansion is expected to be only temporary. The Delta outbreak is expected to delay, but not derail, the recovery. As vaccination rates increase further and restrictions are eased, the economy should bounce back. There is, however, uncertainty about the timing and pace of this bounce-back and it is likely to be slower than that earlier in the year. Much will depend on the health situation and the easing of restrictions on activity. In our central scenario, the economy will be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year.

Notwithstanding the strong economic and labour market outcomes pre-Delta, wage and price pressures remain subdued. Over the year to the June quarter, the Wage Price Index increased by just 1.7 per cent.

Housing prices are continuing to rise, although turnover in some markets has declined following the virus outbreak. Housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors. Given the environment of rising housing prices and low interest rates, the Bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.

Very accommodative financial conditions will continue to support the recovery of the Australian economy. Borrowing rates are at record lows, sovereign bond yields are at very low levels and the exchange rate has depreciated over recent months. The fiscal responses by the Australian Government and the state and territory governments are also providing welcome assistance in supporting household and business balance sheets.

The Board’s decision to extend the bond purchases at $4 billion a week until at least February 2022 reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak. The Board will continue to review the bond purchase program in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target. These bond purchases, together with the low level of the cash rate, the yield target and the funding that has been provided under the Term Funding Facility, are providing substantial and ongoing support to the Australian economy.

The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

Unconventional Economist
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Comments

    • The Traveling Wilbur

      I hope it waa the editor and not Janda who decided to link slashing rates to an RBA cash rate decision despite only reflecting on trends in interest rates and not one single announcement from today (except the RBA’s obviously),

      Clickbait at it’s best from your ABC. Worthy of the SMH.

  1. Lowe also reiterated that the cash rate will not rise until higher inflation is observed

    Many are observing high inflation, look at food prices. The RBA is ignoring this.

    But that’s nothing compared to the asset and house price inflation they’ve created.

    • The Traveling Wilbur

      The waving of the dollar bills in the public’s face will continue until the Benz ownership rate improves.

    • House prices are literally through the roof ridiculous and they will not even contemplate rising rates. Absolutely amazing.

    • Jumping jack flash

      CPI first. Wage inflation next. Its the wage inflation they’re hanging out for, not the CPI. Comments over the years since Phil’s been in charge clearly point to his befuddlement over stagnant wages in the face of such enormous house prices and debt. Clearly his theory about “wealth effect” wasn’t a thing.

      But if Scomo hadn’t bungled the stimulus everything would be ok, but he’s a buffoon that knows nothing much about anything of any consequence with regards to actually running a country and has no need to find out.

  2. pfh007.comMEMBER

    “..Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently…”

    Good luck with that when it is clear government policy to crush wages growth by flooding labour markets with imported labour as soon as is possible. Double vaxed imports are waiting at the departure lounges of our preferred suppliers right now.

    So what we will get is a lot more asset price inflation as the dull witted RBA responds to all the self interested yapping from the financial sector for more “support” of their wealth expansion projects in the form of QE, TFF and ZIRP.

    • Wait we have preferred suppliers? I thought they took anyone who could pay the first semester of a degree, had money to launder or who is willing to work hard for a pittance for a few years first.

    • Jumping jack flash

      There’s clearly two driving forces at play, the first is the RBA who wants CPI and wage inflation (kicked off by unprecedented stimulus) and then there’s the business lobby who erroneously believes that stealing wages will make them richer.

      It does in the short term, and it gets busines owners the debt they need to afford the lifestyle they expect, but in the long term none of their workers can afford to buy anything and business goes bust anyway.

  3. Goldstandard1MEMBER

    Thankfully the RBA will have nothing to do with rates rising in the next 6 months then the fireworks start…..

  4. It’s such a laugh. The RBA wont raise rates until they see higher wage growth, they say, which will never happen in Oz because the labor movement was entranced and captured long ago – giving up all social justice driven class politics. So bosses now decide and they say no, no wage growth for you! So we’ll see massive inflation in everyday living costs driven by the RBA’s ZIRPpfest, and negative real wage growth.

    Future’s so bright….

  5. Here’s a question.
    Why don’t Oz banks buy houses themselves? Directly?
    If they’re such a good investment and all?

    Or do they?

    • They already take most of the profit while we bear most of the risk. Why should they take on the risk when they don’t need to?

  6. blindjusticeMEMBER

    Same story across alot of the West.
    I`m not sure where money goes when its being printed like crazy in hollowed out economies other than into housing and stocks. It only serves to widen the inequality gap.

    • Jumping jack flash

      It gets paid to the banks so they can turn it into nonproductive debt to be spent on consumption.
      It is not traditional “money printing” which would be inflationary. The nonproductive debt is deflationary and thats why we will quickly resume the 2019 slow melt with stagnant wages and no CPI, while the business owners cry for more and cheaper slaves they think will fix the problem.

      The problem is that while there’s no wage inflation how can people become eligible for the debt they need to consume? How can the debt grow fast enough to counter its deflationary effect on the rest of the economy? And if nobody is consuming, how can business owners raise wages?

  7. Jumping jack flash

    If only our leaders knew how to run a stimulus. They surely have a blind spot when it comes to handing out money to workers.

    All this could have been avoided.

  8. Interest rate reductions are largely all that has been the driver of wages growth in Oz for the last 20 years. Indirectly through residential borrowing and dwelling inflation and the flow on effects of that. When you can’t go lower (because you must take your lead from the US and secondarily the Aussie bank lobby won’t let you) and you’re economy is concentrated… The only option is to raise public sector wages… The RBA has one mandate… The maximisation of dwelling inflation.. it’s the serious and embarrassing reality… The only way to achieve it when interest rates can’t go lower is to pull up wages by getting rid of the public sector stingy bargaining agreements and start going Santa Claus on public servants. Watch Phil advocate.