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Summary
- RBA continues with its 0.10% interest rates.
- The yield target and the bond purchase programme are the two key measures to keep interest rates low for the next few years.
- The board of Governors will not raise the cash rate unless inflation is consistently between 2% and 3%.
On Tuesday, Reserve Bank of Australia (RBA) declared that official interest rates would remain unchanged at 0.10% (or 10 basis points), as expected. It also announced the interest rate on the exchange settlement balance of zero percent.
However, it is also preparing to begin phasing out its "abnormal" monetary policy measures implemented in response to the COVID-19 economic crisis.
Source: © Eyeofpaul | Megapixl.com
The decisions are made against the backdrop of an economy that has recovered earlier and performed better than predicted. The Australian economy is on the upswing. Production has gone up and there are more Australians working now than before the pandemic.
However, unemployment rate may get affected with international borders still closed and continued aid from the government may be on cards to support growth.
The recent policies are aimed to boost spending further by keeping interest rates low for the next few years. Two key elements that were considered are.
Also Read: ASX ends 0.7% lower after RBA tweaks bond buying; telco, tech drag
1- The yield target
During an extraordinary period, last year, the 3-year yield objective was introduced in March. It has achieved its goal of cutting Australia's funding costs. The board believed that the likelihood of the cash rate climbing over the next three years – until early 2023 – was extremely low at the time the target was set. There were realistic projections in March of last year that Australia's health system would be overloaded, and it was challenging to see scenarios in which interest rates would rise until early 2023.
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The board recognised that the pandemic would be a significant drag on the economy. Moreover, that recovery would necessitate an extended period of highly low-interest rates, especially given the low inflation rate. In these conditions, the board set a yield goal for the 3-year government bond, which had a maturity date of April 2023 at the time.
After 16 months, the 3-year bond's maturity date has been moved to April 2024, and it will soon be moved to November 2024. The board has re-evaluated the possibility of an increase in the cash rate objective over the next three years, including November 2024.
2- Bond Purchase Program
After the present $100 billion bond purchase programme ends in early September, RBA will continue to buy government bonds. It announced to buy $4 billion worth of bonds every week until at least mid-November. The rate of buying was $5 billion a week earlier.
Still, the conundrum continues...
Even now, we are still well short of our goals of full employment and inflation consistent with the target, said Philip Lowe, RBA Governor.
The board of Governors will not raise the cash rate unless inflation is consistently between 2% and 3%. Inflation forecasting in this range is insufficient. Before we change interest rates, we would like to see some outcomes. Following the completion of bond purchases, the cash rate will be raised.
Lowe further said:
The release further revealed that wage growth is currently less than 3% and it will take a few years before it returns to that level. To get there, further effort on lowering unemployment and underemployment will be required.
Also Read: Mid-Market: ASX edges higher ahead of RBA meeting; energy, material stocks lead
