The RBA Holds Monetary Policy Unchanged, Delivering Aussie Dollar Support

In line with market expectations, the RBA left its cash target rate unchanged at 0.10%, following last month’s cut from 0.25%.

Additionally,

• Left the target rate for the yield on 3-year Australian Government Bonds at 0.10%.
• The Board also left the interest rate on new drawings under the Term Funding Facility at 0.1%.
• Retained the zero interest rate on Exchange Settlement balances.
• Left the government bond purchasing program unchanged.

The Statement

Salient points from the RBA Rate Statement included:

Global Outlook

• Globally, the news has been mixed recently. While infection rates have been on the rise in Europe and the U.S, positive vaccine news should support an economic recovery.
• The economic recovery slowed as a result of the rise in new COVID-19 cases, however.
• Any recovery is also dependent on ongoing support from both fiscal and monetary policy.
• Hours worked in most countries remain noticeably below pre-pandemic levels and inflation is low and below central bank targets.
• Financial conditions remain accommodative globally.
• While bond yields sit near historic lows, vaccine news has given the equity markets a boost.

Australian Economy

• The economic recovery is underway and recent data have generally been better than expected.
• While positive, the Board expects the recovery to be uneven and drawn out.
• In the RBA’s central scenario, the GDP will not reach 2019 levels until the end of 2021. Forecasts are for the economy to grow by 5% in 2021 and by 4% over 2022.
• Employment growth was strong in October, though the unemployment rate rose to 7%.
• The RBA expects a further rise, as firms restructure in response to the COVID-19 pandemic.
• However, the Board forecasts the unemployment to decline next year and to sit at around 6% at the end of 2022.
• As a result of excess capacity, wage growth is subdued and will likely remain so in the coming years.
• The RBA forecasts inflation to be 1% in 2021 and 1.5% in 2022.
• To date, authorized deposit-taking institutions have drawn down A$84bn under the Term Funding Facility.
• Over the past month, the Bank has bought A$19bn of government bonds under the purchasing program.
• Additionally, the bank purchased a further A$5bn of Aussie government securities in support of the 3-year yield target.
• Monetary and fiscal support will be required for some time. As a result, the Board will not increase the cash rate until actual inflation is sustainably within the 2-3% target range.
• Wage growth will have to rise materially to support a pickup in inflationary pressures. This will require significant gains in employment and a return to a tight labor market.
• Based on the outlook, the Board is not expecting to increase the cash rate for at least 3-years.
• In light of the evolving outlook for jobs and inflation, the Board will continue to review the size of the bond purchase program.

In response to the RBA monetary policy decision, the Aussie Dollar rose to a morning high of $0.73685 before easing back.

At the time of writing, the Aussie Dollar was up by 0.31% to $0.70638.

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