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Summary
- RBA believes that the timely use of high efficacy vaccines may improve the medium-term economic outlook.
- The housing market has started to show signs of recovery, and employment has risen faster than anticipated.
- Yield on the long-term bonds have increased amid positive vaccine developments.
In the recent Monetary Policy Meeting of the Reserve Bank of Australia, a host of developments were noted on both the domestic and international front. The meeting was held on 1 December 2020, headed by Governor Philip Lowe.
Here are some important takeaways from the meeting:
International economy may revive on the back of vaccine availability
The momentum in the global activity was seen to be higher than expected in the September quarter. However, the increased pandemic-induced restrictions in the last quarter impacted economic activities.
In the recent times, the world has seen a rising trend in the number of coronavirus infections. And there have been emergency approvals for the use of high efficacy vaccines in the US, UK and European Union. The timely use of these vaccines can reduce the downside risk in the economic outlook, believes RBA.
Read More: RBA Monetary Policy Decision: No Changes to Policy Setup
Domestic economy showing revival signs
The recent lifting of restrictions in Victoria has aided the Australian economic recovery. Besides, the GDP expectations for the last two quarters have been upgraded.
The housing market has also started to show the signs of recovery, and an uptick in the regional housing prices has been noticed.
On the other hand, employment has risen faster than anticipated, although the labor market still has a significant amount of spare capacity left, noted RBA.
International financial markets witnessing sentiments boost
The positive news of vaccine developments has uplifted the sentiments of equity investors and lowered the credit risk premiums, according to RBA. In other developed nations, the central bank´s policy rates have been scaled back as the economic outlook is improving.
Yields on the long-term government bonds have also seen an uptick as the perceived risk is coming down in response to the vaccine developments. The US dollar had fallen in November on the back of improved economic outlook.
Domestic financial markets: Bond yields declining
The three-year Australian government bond yields have fallen to meet the board´s target, reflecting the effectiveness of the recent policy package. The recent purchase program of $19 billion of longer-dated government bonds had also put the pressure on the bonds and aided in lower exchange rates.
In November, the average outstanding interest rates on housing and business loans have fallen to the historic lows. Reduction in the rates has also been seen in a range of deposit products by the banks.
Key Decisions: Existing Policy Settings
The board has reaffirmed the existing policy framework:.
- A set target for cash rate and three-year Australian government bonds yield at 0.1 per cent.
- Zero interest rate on Exchange settlement balances held by financial institutions at the bank.
- The purchase of $100 billion of government bonds with 5 to 10 years of maturity.
- The expanded Term Funding Facility to support credit to SMEs, with an interest rate on new drawings of 0.1 per cent
