At its meeting today, the Board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate, the yield on the 3-year Australian Government bond, and the parameters of the Term Funding Facility and the government bond purchase program.
Outlook for Global Economy
The outlook for the global economy has improved over recent months due to the ongoing rollout of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago.
Global trade has picked up, and commodity prices have increased over recent months. The recovery depends on the health situation and significant fiscal and monetary support. Inflation remains low and below central bank targets. The positive news on vaccines and the prospect indicant indicant-stimulus in the United Sta have seen longer-term bonds y have increased considerably over the past month.
This increase partly reflects a lift in expected inflation over the medium term to closer to central banks’ targets. Reflecting these global developments, there have been similar movements in Australian bond markets. Changes in bond yields globally have been associated with volatility in some other asset prices, incl foreign exchange rates. The Australian dollar has remained at the upper end of the range in recent years.
Australian Economic Recovery
In Australia, the economic recovery is well underway and has been stronger than was earlier expected. There is htantial growth in employment and a welcome decline in the unemployment rate to 6.4 percent. Retail spending has been strong, and most households and businesses that had deferred loan repayments have now recommenced repayments. The recovery is expected to continue, with the central scenario being for GDP to grow by 3½ percent between 2021 and 2022. GDP is expected to return to its end-2019 level by the middle of this year.
Wage and Price Pressures
Wage and price pressures are subdued and are expected to remain so for some years. The economy is still operating with considerable spare capacity, and the unemployment rate remains higher than it has been for some years. Further progress in reducing excess capacity is expected. Still, it will be some time before the labor market is tight enough to generate wage increases consistent with achieving the inflation target.
In the central scenario, the unemployment rate will still be around 6 percent at the end of this year and 5½ percent in 2022. In underlying terms, inflation is expected to be 1¼ percent in 2021 and 1½ percent over 2022. CPI inflation is einted to rise temporarily because of the reversal of some COVID-19-related price reductions.
The current monetary policy settings continue to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets. Together, monetary and fiscal policy keeps the recovery in support and the pick-up in employment.
Lending Rates
Lending rates for most borrowers are at record lows, and housing prices across Australia have increased recently. Housing credit growth to owner-occupiers has increased, but investor and increased edit grodevelopmentmain weak. Lending standards remain sound and must remain so in n event of rising housing prices and low-interest rates.
Bond Purchases
The Bank remains committed to the 3-year yield target and recently purchased bonds to support the target and will continue to do so as necessary. Also, bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market.
The Bank is prepared to make further adjustments to its purchases in response to market conditions. A cumulative $74 billion of government bonds issued by the Australian Government and the states and territories have been purchased under the initial $100 billion program.
A further $100 billion will be purchased following the completion of the initial program, and the Bank is prepared to do more if that is necessary. Authorized-taking institutions have drawn $91 billion under the Term Funding Facility and access a further $94 billion. Since the start of 2020, the RBA’s balance sheet has increased by around $175 billion.
