Inflation unlikely within RBA target range until 2024; rise in bonds yields not a concern

The central bank’s policy measures will continue to deliver very stimulatory monetary conditions until the economy returns to full employment and inflation is consistent with the target. 

Speaking at the Kanga News Debt Capital Markets Summit, the official reiterated that s inflation is unlikely to be sustainably within the target range of 2 to 3 percent until 2024 at the earliest despite record low interest rates and a massive government bond-buying program. 

Kent noted that a key part of the stimulus package was the $200 billion term funding facility established to give the banks access to very cheap money when the pandemic hit. 

The assistant governor told the conference that the drawings under the TFF have picked up noticeably ahead of the 30 June deadline when final drawdowns are due. 

To date, drawdowns from the TFF amount to $145 billion. Banks have until the end of this month to draw on remaining allowances of $64 billion.  

“We anticipate that the bulk of funding available under the facility will be taken up, and so the scheme will be providing a substantive source of low-cost funds for the next three years,” he said, adding that the substantial fall in Australian banks' funding costs has been passed through to borrowers. 

A rise in yields not a concern 

He noted that bond yields and interest rates have increased over recent months in response to the improved outlook for economic activity and inflation, both here and offshore. 

Kent also noted that long-dated sovereign bond yields rose to around pre-pandemic levels earlier this year,  

"The adjustments in financial markets to date are not a cause for concern, however," he argued. 

“Measures of inflation expectations have returned to levels of a few years ago, when inflation was consistent with, or even below, inflation targets,” Kent said. “In other words, they don’t point to inflation over the coming years sitting above central bank targets in a sustainable way. 

"The increase in nominal yields has been smaller than the increase in expected inflation, which implies that real yields have declined.  

"This is beneficial because it means that monetary policy is more stimulatory than otherwise." 

The official noted that some banks have increased rates on fixed-rate loans with terms of between 3 to 4 years but said the increase has been modest to date and so these rates remain very low in historical terms.  

"In short, there's been a bit of an increase in some new fixed rates, but the effect of this on broader financial conditions is minimal, and shorter-term rates, including for variable-rate loans which constitute the bulk of credit, will remain low for as long as it takes to achieve the bank's inflation goals." 

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