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Summary
- RBA Governor Philip Lowe Since has decided against the withdrawal of the monetary stimulus, citing how the targets set up for inflation and unemployment would take a few more years to be met.
- Lowe said that suspension of bond purchase would have caused ‘unwelcome upward’ pressure on the exchange rate when other central banks had already announced such extensions.
- The RBA Governor said that the official cash rate, which was kept unchanged at 10 basis points on Tuesday, would be maintained as long as necessary.
In a categorical message to the financial markets, Reserve Bank of Australia (RBA) Governor Philip Lowe
warned against the “premature” withdrawal of the monetary stimulus since it might take few more years to meet the targets for inflation and unemployment.
Even as last year’s monetary stimulus package supported the COVID-19-hit economy, the monetary support was needed for some more time, he implied.
Image Source: Shutterstock
On RBA’s decision to continue the purchase of bonds, Lowe said the bond purchases, the term funding facility, the 3-year yield target and the record low cash rate together have been successful in keeping the funding costs low for borrowers. Besides, the four measures helped the banking system to provide the credit needed for economic recovery. These have also led to a lower value of the Australian dollar than expected otherwise, Lowe noted.
Why bond purchase is the key
In its monetary policy decision announced Tuesday, the RBA announced that it would continue the purchase of bonds issued by the federal government, the states and territories at the completion of the current A$100 billion program in mid-April 2021. The additional purchases will be at the rate of A$5 billion a week.
Image Source: RBA, 3 February 2021
Lowe said that suspension of bond purchase would have caused ‘unwelcome upward’ pressure on the exchange rate at a time when other central banks had already announced such extensions.
READ MORE: RBA’s bond buying spree sends ASX shares higher
Cash rate
The RBA Governor said that the official cash rate, which was kept unchanged at 10 basis points on Tuesday, would be maintained as long as necessary. The central bank wants to see the inflation sustainably within the 2 per cent to 3 per cent target before it decides to increase the cash rate. However, this would require a tighter labour market and healthier wages growth than what is being anticipated currently by the central bank. The central bank doesn’t expect the same to happen before 2024. Lowe said that this indicated the interest rates would remain lower for some more time.
READ MORE: RBA anticipates asset prices to shoot up over lower interest rates, housing price to surge 30%
