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The Reserve Bank of Australia (RBA) Board met on 2 November 2021 and decided to reaffirm the targets for the cash rate of 10 basis points, the interest rate on exchange settlement balance of 0% and the purchase of government bonds at the rate of $4 billion a week. However, the RBA Board decided to discontinue the target of 10 basis points for the April 2024 Australia Government Bond (i.e., the 3-year rate).
Cash rate decision
The cash rate has been maintained in the effective lower bound of 0.10%. The RBA expects the cash rate to remain in this lower bound until the inflation rate is sustainably within the 2–3% target range. For this to happen, the economy would have to be in or close to full employment (around 4% unemployment). Comments from the RBA Governor suggest that the cash rate will be 0.10% until 2023 (changed from 2024). However, market expectations are that the cash rate is expected to increase next year. This is mainly due to the market’s perception of inflation expectations and the strength of the Australian economy.
Asset purchases
In March 2020, the RBA decided for the first time to undertake an asset purchasing plan (price target) involving purchasing Australian government bonds to target the 3-year bond rate at 0.25% (in line with the cash rate at the time). In November 2020, the target for the 3-year bond rate was reduced to 0.10% (in line with a reduction in the cash rate to 0.10%). The decision to now discontinue this policy reflects the improvement in the economy and the earlier than expected progress towards the inflation target. This should push up other interest rates in the economy such as 3-year fixed-rate mortgages and 3-year corporate bond yields, as the 3-year government bond yield is the reference point for other relevant interest rates.
The RBA also decided in November 2020 for the first time to undertake an asset purchasing plan (quantity target) to purchase Australian government bonds on the long-end of the yield curve (5, 7 and 10-year government bonds). Reducing government bond yields along the yield curve should translate in relative lower business bank rates and corporate bond yields, reducing the cost of borrowing for business. The RBA is expected to continue these bond purchases until at least February 2022.
What is the outlook for the Australian economy?
The short-term outlook for the Australian economy has improved since the re-opening of Sydney and Melbourne. However, it is likely that GDP growth in the September quarter of 2021 will be negative. It is unlikely Australia is going to re-enter a recession (2-quarters of negative GDP growth) as it is expected there should be a bounce back to economic activity in the December quarter of 2021, now that lockdowns have been removed. The RBA Board has noted that the central forecast is for the unemployment rate to trend lower over the next couple of years, reaching 4.25% at the end of 2022 and 4% at the end of 2023.
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This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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