Reserve Bank of Australia (RBA) July 2021 Meeting Summary and Outlook

The Reserve Bank Board met on Tuesday the 6th of July. At that meeting, they agreed on policy measures that will provide ongoing and important support to the Australian economy as it continues its recovery. You can see by the chart below the Government stimulus is a major contributor to GDP Growth with an export slump. 

 

In particular the RBA decided to:

1) Maintain the cash rate target at 0.10%.

The Board reiterated that they do not intend to increase the cash rate until inflation is sustainably within the 2% to 3% range. It is not enough for inflation to be forecast in this range. They want to see results before they change interest rates. Any increase in the cash rate will take place after bond purchases have ended. 

For inflation to be sustainably in the 2% to 3% range, it is likely that wages growth will need to exceed 3%. That is on the basis that labour productivity continues to increase and that the labour share of national income remains broadly steady. The current rate of wage growth is materially less than 3% and they expect it will be a few years still before it increases back above 3%. Further progress on reducing unemployment and underemployment will be needed to get there.

The situation today is quite different from that in March last year; they are no longer looking over a cliff but instead transitioning from recovery to expansion. This improvement has widened the range of plausible scenarios for the cash rate. Their central scenario continues to be that the condition for an increase in the cash rate will not be met until 2024. But there are alternative plausible scenarios as well. This means that probabilities have shifted and the decision to adjust the approach to the yield target reflects this shift in probabilities.

In particular, the Board has decided to maintain the April 2024 bond as the target bond, rather than extend the horizon to the bond with a maturity date of November 2024. This means that, as time passes, the maturity of the yield target will naturally decline. The Board remains committed to the target of 0.10%, which is the same rate as the target for the cash rate.

2) Continue purchasing government bonds after the completion of the current bond purchase program in early September. They will purchase $4 billion of bonds a week until at least mid-November.

This program has lowered risk-free yields across the yield curve in Australia, thereby lowering funding costs for all borrowers. In turn, this has contributed to a lower exchange rate that otherwise, freed up cash flows for households and businesses, and strengthened balance sheets by supporting asset values. The bond purchases have also led to portfolio rebalancing by investors, and this too has supported the prices of other assets.

The second $100 billion tranche of purchases will be completed in early September. The RBA will continue to purchase bonds after this date, providing ongoing support to the Australian economy. They will continue do so in the current 80/20 spilt between Australian Government Securities and the securities issued by the states and territories. These purchases will be at the rate of $4 billion a week, a slight decrease to the $5 billion a week under the current program.

The Board will next review the rate of purchases at its November meeting. Its decision to do so, rather than lock in this volume of purchases for a longer period, reflects the balance of 2 considerations.
The first is the benefit of being able to respond in a timely way to the flow of economic news. In a world characterised by a high degree of uncertainty, there is benefit from not being locked into a particular path for an extended period.

The second is that their guidance about future bond purchases helps with market pricing. The more information the market has about these purchases, the more efficiently they can be reflected in market prices.

The board explained they will continue buying bonds until there is further material progress towards the goals for full employment and inflation. By mid-November, their cumulative purchases under the bond purchase program will have amounted to $237 billion. They will hold little more than 30% of Australian government bonds on issue and 15% of state and territory bonds. This represents a substantial and ongoing degree of support to the Australian economy.

Please contact us if you have any questions.


Kind regards,

The Coastline Private Wealth Team.

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