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The Reserve Bank of Australia (RBA) Board met this month (7 September 2021) and decided to reaffirm the targets for the cash rate and the yield on 3-year Australian government bonds of 10 basis points, the interest rate on exchange settlement balance of 0% and purchase government bonds at the rate of $4 billion a week (reduced from $5 billion a week).
Cash rate decision
The cash rate has been maintained in the zero-lower bound of 0.10%. The RBA expects the cash rate to remain in this lower bound until the Australian economy reaches full employment (around 4% unemployment), or if the inflation rate surpasses the 2 – 3% inflation target range. Comments from the RBA Board suggest that this target will be maintained for around 3 years.
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 RBA also decided 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).
That is, the RBA is undertaking two different styles of asset purchases targeting different parts of the Australian government bond yield curve. The price target is targeting the shorter end of the yield curve while the quantity target (otherwise known as quantitative easing) is targeting the longer end of the yield curve. 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. Interestingly, this month’s announcement noted that asset purchases (quantity target) is going to be reduced to $4 billion a week from $5 billion. This may come as a surprise considering economic conditions in the short-term have deteriorated due to lockdowns in NSW, VIC and ACT. The RBA is expected to continue these bond purchases until at least February 2022. It is likely the RBA will make smaller and less frequent purchases of government bonds if conditions improve.
What is the outlook for the Australian economy?
The short-term outlook for the Australian economy is poor. It is likely that GDP growth in the September quarter of 2021 will be negative. However, 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 although this is dependent on an easing of current lockdowns. It is also likely during the September quarter of 2021 unemployment should increase, reflecting difficult business conditions in NSW, VIC and ACT. The longer-term outlook is more uncertain. The RBA expects economic growth to return to the level of growth recorded before the delta outbreak by the second half of 2022.
Disclaimer:
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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