The Reserve Bank of Australia has left the official cash rate on hold at its July meeting, but signalled it intends to wind back its bond buying program as Australia transitions from “recovery to expansion”.
Announcing the news today, Reserve Bank Governor Dr Philip Lowe noted Australia was “no longer looking over a cliff” and had come a long way from the uncertainty of a year ago.
“This improvement has widened the range of plausible scenarios for the cash rate,” he said.
The RBA had previously stated the cash rate would be kept on hold at the record low of 0.1 per cent until inflation is in the 2 to 3 per cent target range, which they predict is unlikely to occur until 2024.
For that to happen they are looking to see full employment along with wages growth.
Despite noting the economy had “bounced back earlier and stronger” than expected, today’s meeting saw the RBA maintain that position.
“Our central scenario continues to be that the condition for an increase in the cash rate will not be met until 2024,” Dr Lowe said.
However, he stressed the condition for an increase in the cash rate depended upon the data, not the date, noting “it is based on inflation outcomes, not the calendar”.
“Our strategy is to do what we reasonably can with monetary policy to achieve low unemployment and a rate of inflation that is sustainably in the 2 to 3 per cent target range.
“Today’s decisions, together with those we have taken previously, have us on a path to achieving those objectives.”
While the cash rate remains on hold, the RBA has shifted its monetary policy slightly in recognition of the fact the economy is in a far different position to a year ago.
At today’s meeting they voted to maintain the April 2024 bond as the target bond, rather than extend the horizon to the bond with a maturity date of November 2024.
They also announced they would reduce their future spending on Australian Government and state-issued bonds, dropping purchases from $5 billion a week to $4 billion from September until at least mid-November when the scheme will be reviewed again.
“We are still well short of our goals for full employment and inflation, and this means that a continuation of monetary support through bond purchases is appropriate,” Dr Lowe said.
“At the same time, though, the economy is on a better path than we had earlier expected and the outlook has improved. We have responded to this improved situation by adjusting the weekly purchases from $5 billion to $4 billion.”
Dr Lowe explained the bond buying program had lowered risk-free yields across the yield curve in Australia, thereby lowering funding costs for all borrowers.
“In turn, this has contributed to a lower exchange rate than otherwise, freed up cash flows for households and businesses, and strengthened balance sheets by supporting asset values,” he said.
“The bond purchases have also led to portfolio rebalancing by investors and this too has supported the prices of other assets.
“It is through these channels that our bond purchases have supported the economic recovery in Australia.”
In the meantime, Dr Lowe said the Australian economy was on a positive path, with the country in a much better position than previously expected.
“Output is now above its pre-pandemic level and more Australians have a job than they did before the pandemic.
“The unemployment rate has returned to its pre-pandemic level, underemployment has declined and job vacancies are at a high level.”
On the flipside, wages and prices have not experienced the same surge.
“Both aggregate wage growth and underlying inflation remain subdued and we expect this to remain the case for some time yet,” Dr Lowe said.
One area the RBA will be watching closely is labour supply and demand in the wake of prolonged international border closures.
“There have been increased reports of labour shortages in parts of the country and a step-up in wage increases for some occupations,” he said.
“Even so, wage increases for most Australians are still modest and the expected pick-up in overall wages growth is still forecast to be only gradual.
Reflecting on recent snap lockdowns in multiple states, Dr Lowe said they would likely affect the economy in the short term but not the long run.
“Australia’s experience has been that once an outbreak is contained and restrictions are eased, the economy bounces back quickly,” he said.
However, he cautioned that recent events illustrate it can be difficult to predict the future.
“It is possible that we will experience further setbacks and we need to be prepared for this,” he said.
“But it is also possible that we experience further positive surprises for the economy; over most of this year we have had a run of better-than-expected data and this could continue.”
