RBA holds rates steady

  • By Elizabeth Fry

 Delays winding back bond buying until September 

Australia’s central bank will continue to purchase government securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid-November. 

As expected, the Reserve Bank of Australia has left its target interest rates unchanged 0.1 percent and reiterated that it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range.  

“The central scenario for the economy is that this condition will not be met before 2024,” RBA Governor Philip Lowe, said in a statement on Tuesday. 

“Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.” 

Tuesday’s announcement surprised many economists who had expected RBA to reverse its taper plan given the sharp deterioration in the economy. The central bank said it was sticking to its plan to reduce its bond buying in September arguing that once the lockdowns end the economy bounces back quickly. 

But Lowe left the door open for the central bank to change its QE plans by stating that 'the board will maintain its flexible approach to the rate of bond purchases. “The program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target, he said. 

Plenty of time   

However, not everyone is on the back foot. JP Morgan economist Ben Jarman said while the increase in cases and associated lockdowns have material near-term implications for growth, he did not expect the RBA to make any changes to the bond-buying program for three reasons. 

“First, the reduction in the weekly pace of purchases only takes effect from September, meaning there is no immediate need for the RBA to decide on the program at the August meeting,” he said. 

Second, Jarman pointed out that the central bank has made it clear that the stock of holdings, rather than the flow of purchases, is the most important measure of policy support, with Lowe noting current Commonwealth bond holdings already provide “substantial” support to the economy.  

Third, the economist went on to say, the past week’s US Federal Reserve meeting suggested progress required to start tapering its own QE program is drawing closer.  

"Given the RBA’s decision to pursue programmatic QE was, in part, undertaken to prevent its balance sheet from drifting too far from global peers, the prospect of Fed tapering will likely influence the RBA’s thought process." 

The economist predicts that in Friday’s Statement on Monetary Policy the RBA will slash its year-end real GDP growth forecast to 2 percent per year - from 4.75 percent - following the spike in Covid cases.