The Reserve Bank board held official interest rates at a record low 0.1% at its first meeting of the year, left the key bank lending support measure unchanged, but surprised with news that it will boost its quantitative easing by another $100 billion in April.
Governor Philip Lowe, who will make his first-ever address to the National Press Club in Canberra today to outline the bank’s expectations for the economy, confirmed in his post-meeting statement on Tuesday that there would be no change in the RBA’s key policy setting this month.
That’s despite the governor seeing the economy back to pre-COVID levels by mid year – much earlier than though in 2020 when the end of this year was seen as the best guess.
The Aussie dollar fell from 76.60 US cents to 76.35 US cents in the wake of the statement’s release, while the yield on the 10 year bond dipped from 1.17% to 1.11% as traders realised the bank was going to continue targeting this area to keep a lid on the value of the dollar (especially against the US currency).
But the news saw the ASX 200 jump by another 0.3% or 40 points to end the day up 1.5%
And while the governor dropped any direct reference to keeping rates at their current record low of 0.10%, Dr Lowe made it clear that it would be 2024 (instead of 2023 as estimated in his 2020 statement0 before the RBA might be in a position to lift rates.
“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. 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.
“The Board does not expect these conditions to be met until 2024 at the earliest,” he said.
With the Federal Government hellbent on ending the JobKeeper and JobSeeker support payments from the end of March, Mr Lowe indicated that it will be up households to support the economy and maintain spending and demand.
“An important near-term issue is how households and businesses adjust to the tapering of some of the COVID support measures and to what extent they will use their stronger balance sheets to support spending.”
But the Governor confirmed the central bank is happy to see the economy better placed than it was thinking in late 2020.
“In Australia, the economic recovery is well under way and has been stronger than was earlier expected. There has been strong growth in employment and a welcome decline in the unemployment rate to 6.6 per cent.
“Retail spending has been strong and many of the households and businesses that had deferred loan repayments have now recommenced repayments. These outcomes have been underpinned by Australia’s success on the health front and the very significant fiscal and monetary support,“ Dr Lowe said.
But even with the improvement in the economy, there are weakness which are being supported by monetary and fiscal policy:
“Financial conditions remain highly accommodative, with lending rates for most borrowers at record lows and asset prices, including housing prices, mostly increasing. Housing credit growth to owner-occupiers has picked up recently, but investor and business credit growth remain weak. The exchange rate has appreciated and is in the upper end of the range of recent years.”
“Wage and price pressures remain subdued. The CPI increased by just 0.9 per cent over the year to the December quarter and wages (as measured by the Wage Price Index) are increasing at the slowest rate on record.
“Both inflation and wages growth are expected to pick up, but to do so only gradually, with both remaining below 2 per cent over the next couple of years. In underlying terms, inflation is expected to be 1¼ per cent over 2021 and 1½ per cent over 2022.”
And the surprise decision to spend another $1 billion to put a lid on the 10 year bond yield and the value of the Aussie dollar?
Dr Lowe explained:
“The current monetary policy settings are continuing to help the economy by lowering financing costs for borrowers, contributing to a lower exchange rate than otherwise, supporting the supply of credit needed for the recovery and supporting household and business balance sheets. The decision to extend the bond purchase program will ensure a continuation of this monetary support.”
That’s an economy still in the ICU.
