RBA Holds Rates, Returns To Watch & Wait Mode

By Glenn Dyer | More Articles by Glenn Dyer

As expected the Reserve Bank left monetary policy unchanged with the cash rate unchanged at 0.10% and no sign of any desire to make an adjustment any time soon.

Try three years, as Governor Philip Lowe again indicated in Tuesday’s statement.

The decision came ahead of Governor Lowe’s appearance later today in Canberra before a meeting of the House of Representatives Economic Committee and the release of the September quarter’s National Accounts and GDP data that is expected to reveal a modest rise in growth for the three months after the 7% slump in the June quarter.

After the significant further easing at its November meeting – with a cut in the cash rate, Term Funding Facility rate, and three-year bond yield target to 0.1%; the six month $100 billion bond buying program; and a dovish shift in formal guidance to not increase the cash rate until actual inflation is sustainably in the 2- 3 percent target range – no further easing was expected at this month’s meeting.

Basically, the RBA is back in wait and see mode as it assesses how the recovery is preceding and how it’s most recent easing measures are helping.

Yesterday’s statement revealed that the RBA has so far its purchased $19 billion of bonds under its $100 billion six month government bond purchase program.

The RBA noted yesterday that an economic recovery is “underway”. Data yesterday on building approvals for October supported that – up 3.8% from September (when there was a solid rise) which was against a market forecast for a 1% fall.

The strong November performance of most financial and commodity markets (not gold) indicates a global recovery is emerging – more strongly China where trade tensions are a big concern.

Reflecting the combination of good vaccine news(Three candidates awaiting key approvals which could come in the next few days) and the improving Australian economic data (such as the 178,000 jobs filled in October) the RBA sounded a little bit more upbeat in terms of the outlook.

It sees GDP regaining pre-COVID levels by the end of 2021 in its best economic forecast.

But it remains ultra-cautious and still sees the recovery as likely to be “uneven and drawn out” and given the uncertainties around the outlook and the high level of spare capacity in the economy – notably unemployed and underemployed workers.

Despite the continuing hints of improvement in the economy, Dr. Lowe again made it clear that the bank will be waiting a long time to change policy.

“…the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range,“ he again restated in his post meeting statement yesterday.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least 3 years.”

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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