Quantitative Easing

Australian bank holds rates as economy soars, Australian dollar slips

Pedestrians walk past the main entrance to the Reserve Bank of Australia (RBA) headquarters in central Sydney, Australia on October 3, 2016. REUTERS / David Gray

Australia’s central bank left its cash rate at an all-time high on Tuesday and reiterated its policy of decline for longer even as data showed the country’s economic output was above its pre-pandemic level and house prices were skyrocketing.

The Reserve Bank of Australia (RBA) left its policy parameters at 0.1% for a sixth consecutive meeting, pending inflation and wage pressures, in a move widely awaited by economists in a Reuters poll.

The local dollar stumbled to $ 0.7740 from a week-long high of $ 0.7769 reached earlier in the day as the RBA upset some market participants who expected a hawkish tilt in the central bank’s statement, according to its New Zealand counterpart. [nL3N2NJ0VA]

Last week, the Reserve Bank of New Zealand (RBNZ) hinted at the end of ultra-loose monetary policy in the era of the pandemic, leading some to believe the RBA would also venture on this path.

Governor Philip Lowe instead justified the need for rates close to zero despite a strong economic recovery by stating that “inflation and wage pressures are moderate” and that a price recovery should only be “gradual and modest”.

“A significant continuing source of uncertainty is the possibility of significant virus outbreaks,” Lowe added.

Australia’s second most populous state of Victoria plunged into lockdown last week after the state reported its first cases of locally transmitted coronavirus in nearly three months. Read more

The RBA has also reiterated that it will not raise interest rates until inflation is “sustainably” within its target range of 2-3%. In its central scenario, core inflation is seen below the midpoint of this range until mid-2023.

The comments come even as recent economic data points to renewed activity.

A string of strong numbers earlier today prompted analysts to sharply revise their forecast for Australia’s first quarter gross domestic product (GDP) growth to 1.6%, from 1% before the data was released. Read more

Separate figures showed the Australian home value index jumped 10.6% in May from a year ago to record its highest annual growth rate in almost 11 years. Read more

First quarter GDP data is due at 00:30 GMT on Wednesday.

“Given the speed of the recovery, we believe there is a good chance that the RBA’s rate hike targets will be met by the ‘earliest 2024’ it refers to and therefore allow for a first rate hike at the end of 2023, “said Shane Oliver, AMP chief economist.

“But it’s still a long way off. The key to watch will be unemployment, which will rise to 4% and wage growth above 3%.”

The unemployment rate is currently 5.5% while wage growth is creeping at an anemic rate of 1.5%.

Economists have said the July board meeting, at which the RBA will review its unconventional political parameters, will be crucial.

They expect the RBA to decide not to extend its three-year target of 0.1% beyond the April 2024 government bond. A third round of quantitative easing (QE) is on its way. however widely expected, albeit smaller than the A $ 100 billion seen in each of the first two cycles.

“We can see the merit of a modest reduction given the strength and widening of the recovery,” said RBC economist Su-Lin Ong, forecasting a third QE of A $ 75-100 billion.

Our standards: Thomson Reuters Trust Principles.

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