Reserve Bank signals positive economy, but keeps foot on the accelerator

The Reserve Bank of Australia (RBA) has taken a small but well signalled step towards normalising monetary policy by sometime in 2024, by trimming its multi-billion-dollar bond purchases by 20% a week and signalling the 0.10% cash rate will likely change sometime in 2024.

Reserve Bank governor Philip Lowe announced in a post-meeting statement on Tuesday that the RBA won’t extend its bond targeting program to the November 2024 bond, saying it was pleased with the economy’s recovery but still sees a long way to go until its inflation and wages goals are met.

Today’s meeting was flagged as a key decision point as to whether, in order to maintain bond yields at 0.1%, the bank would begin purchases of the November 2024 bond after its focus to date on the April 2024 bond. Such a move would have indicated it was not confident economic conditions would warrant tightening until 2025. Instead, Lowe announced the bank would “retain the April 2024 bond as the bond for the yield target and retain the target of 10 basis points”.

The bank will also ease back on its bond acquisition program, albeit not by much: “The board is responding to the stronger-than-expected economic recovery and the improved outlook by adjusting the weekly amount purchased” down to $4 billion a week. “It will conduct a further review in November, allowing the board to respond to the state of the economy at that time.”

Its considerations, in the end, were unaffected by the current lockdowns. “One near-term uncertainty is the effect of the recent virus outbreaks and the lockdowns. But the experience to date has been that once outbreaks are contained and restrictions are eased, the economy bounces back quickly.”

The foundation of the bank’s optimism is the labour market. “The labour market has continued to recover faster than expected. The unemployment rate declined further to 5.1% in May and more Australians have jobs than before the pandemic. There has also been a welcome decline in underemployment and labour force participation is around record highs. Job vacancies are high and more firms are reporting shortages of labour, particularly in areas affected by the closure of Australia’s international borders.”

But as the bank has said repeatedly, this hasn’t yet translated into inflation: “Inflation and wage outcomes remain subdued. While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest.”

The outcome is a definite tapering of quantitative easing by the RBA in the face of better-than-forecast economic conditions. But it remains committed to quantitative easing at a lower level, reflecting that we’ve only just begun approaching the bank’s goal of unemployment low enough to push up wages and stimulate inflation.