Australian Cash Rate Maintained for 12th Month, Bond Yield Target Discontinued

Office employees walk in front of the Reserve Bank of Australia in Sydney on Sept. 4, 2018. (Saeed Khan/AFP/Getty Images)

The Reserve Bank of Australia has retained the cash rate at 0.1 percent for the 12th month after its monthly board meeting, despite mounting inflation and rate hikes by the big four banks.

The bank has frequently stated that the cash rate will not be raised until inflation is sustainably between 2 to 3 percent, a policy that remains unchanged.

Previously, Australia was forecasted to achieve this target at 2024 “at least,” but is now projected to reach the target by late-2023.

“Inflation has picked up, but in underlying terms is still low, at 2.1 percent,” RBA governor Philip Lowe said in the monetary policy decision statement.

“A further, but only gradual, pick-up in underlying inflation is expected.”

The RBA now expects underlying inflation to reach 2.25 percent over 2021-22 and 2.5 percent over 2023.

“The main uncertainties relate to the persistence of the current disruptions to global supply chains and the behaviour of wages at the lowest unemployment rate in decades,” Lowe said.

Lowe said the bank was prepared to wait for the labour market to tighten enough to generate wage growth, thereby pushing inflation.

“This is likely to take some time,” Lowe said. “The [RBA] board is prepared to be patient.”

ANZ head of Australian economics David Plank said the reason why the RBA can afford to be patient is due to low underlying inflation and wages growth.

Meanwhile, according to ANZ and Commonwealth Bank economists’ expectations, the yield target for the April 2024 bond was removed, given the recent inflation figures.

“The decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target,” Lowe said.

“Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished.”

Westpac said the RBA board made a “responsible decision” to move away from the extreme policies for the COVID-19 emergency.

“But now the economy is recovering, and inflation is lifting, it is appropriate to revert back to a standard policy approach,” Westpac economist spokesman Bill Evans said.

Commonwealth Bank senior economists Kristina Clifton and Belinda Allen said they expect the first RBA hike to be in Nov. 2022, from 0.1 to 0.25 percent.