— Property

Cash Rate On Hold at 0.10%

At its meeting today, the Board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond and the parameters of the Term Funding Facility and the government bond purchase program.

Graph of the Cash Rate Target

graph of cash rate target-1

Outlook for Global Economy

The outlook for the global economy has improved over recent months due to the ongoing rollout of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago.

Global Trade

Global trade has picked up, and commodity prices have increased over recent months. Even so, the recovery remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.

The positive news on vaccines, together with the prospect of further significant fiscal stimulus in the United States, has seen longer-term bond yields increase considerably over the past month.

This increase partly reflects a lift in expected inflation over the medium term to closer to central banks’ targets. Reflecting these global developments, there have been similar movements in Australian bond markets.

Changes in bond yields globally have been associated with volatility in some other asset prices, including foreign exchange rates. The Australian dollar has remained in the upper end of the range in recent years.

Australian Economic Recovery

In Australia, the economic recovery is well underway and has been stronger than was earlier expected. There has been substantial growth in employment and a welcome decline in the unemployment rate to 6.4 percent. Retail spending has been strong, and most households and businesses that had deferred loan repayments have now recommenced repayments.

The recovery is expected to continue, with the central scenario being GDP to grow by 3½ percent over 2021 and 2022. GDP is expected to return to its end-2019 level by the middle of this year.

Wage and Price Pressures

Wage and price pressures are subdued and are expected to remain so for some years. The economy is still operating with considerable spare capacity, and the unemployment rate remains higher than it has been for some years. Further progress in reducing excess capacity is expected. Still, it will be some time before the labor market is tight enough to generate wage increases consistent with achieving the inflation target.

In the central scenario, the unemployment rate will still be around 6 percent at the end of this year and 5½ percent at 2022. In underlying terms, inflation is expected to be 1¼ percent over 2021 and 1½ percent over 2022. CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions. The current monetary policy settings continue to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button