Australia's central bank on Tuesday took its first step towards tempering its massive stimulus as employment proves far stronger than previously expected, although actual rate hikes remain a distant prospect. The latest statement from the Reserve Bank of Australia leaves the date of the forward guidance on the first hike in the cash rate unchanged at 2024. But it looks as if they are preparing the ground for an adjustment to this guidance and other policies to bring them more into line with Australia's strong economic fundamentals.
The economy is great - rates on hold?
The economic recovery in Australia is stronger than earlier expected and is forecast to continue
The fact that wage and inflation outcomes remain "subdued" is also at least partly a function of the fact that this quarterly data comes out with a considerable lag. There is not any new wages data for 2Q21 until 18 August, though CPI for 2Q21 is released a bit earlier on 28 July. Current justifications are being made with reference to some fairly dated figures.
Mortgage rates also hit record lows in 2020 during the depths of the COVID-19 recession, as the RBA slashed the official cash rate, provided low-cost three-year funding to the banks ( through the term funding facility, which expired last week) and started purchasing government bonds, all with the aim of keeping rates low through to 2024.
Rates on hold but tapering on
At its meeting today, the Reserve Bank board held the official cash rate target at a record low of 0.1, where it has been since November last year. The interest rate for commercial banks parking money at the RBA remained at zero.
As widely expected, given recent positive economic data, the bank also retained the federal government bonds maturing in April 2024 as the focus of its 0.1 per cent yield target. that has the effect of not extending that means of keeping interest rates very low further into the future, as would have happened if the target bond was switched to November 2024.However, in a generally unexpected move, the RBA announced it would scale down its bond buying program from $5 billion a week currently to $4 billion a week from early September "until at least mid-November" when the scheme would be reviewed again.
The bank took everyone by surprise when it announced that the bank will purchase $4 billion per week instead of the previous $5 billion per week, with that pace set to remain in place 'at least until mid-November. In short, the bank has pulled back on the stimulus it is providing to keep mortgage and other borrowing rates extremely low, but only very marginally. Broadly the RBA remains committed to maintaining highly supportive monetary conditions to support a return to full employment. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The bank's central scenario for the economy is that this condition will not be met before 2024.