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, as
well as the parameters of the Term Funding Facility and the government bond purchase program.
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 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 rates that are 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 remains in the upper end of
the range of recent years.
In Australia, the economic recovery is well under way and has been stronger than was earlier expected.
There has been strong growth in employment and a welcome decline in the unemployment rate to
6.4 per cent. Retail spending has been strong and most of the households and businesses that
had deferred loan repayments have now recommenced repayments. The recovery is expected to continue, with
the central scenario being for GDP to grow by 3½ per cent over both 2021 and 2022. GDP is
expected to return to its end-2019 level by the middle of this year.
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 spare capacity is expected, but it will be some time before the
labour market is tight enough to generate wage increases that are consistent with achieving the
inflation target. In the central scenario, the unemployment rate will still be around
6 per cent at the end of this year and 5½ per cent at the end of 2022. In
underlying terms, inflation is expected to be 1¼ per cent over 2021 and
1½ per cent 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 are continuing 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. Together, monetary and fiscal policy are supporting the recovery
in aggregate demand and the pick-up in employment.
Lending rates for most borrowers are at record lows and housing prices across Australia have increased
recently. Housing credit growth to owner-occupiers has picked up, but investor and business credit
growth remain weak. Lending standards remain sound and it is important that they remain so in an
environment of rising housing prices and low interest rates.
The Bank remains committed to the 3-year yield target and recently purchased bonds to support the
target and will continue to do so as necessary. Also, bond purchases under the bond purchase program
were brought forward this week to assist with the smooth functioning of the market. The Bank is prepared
to make further adjustments to its purchases in response to market conditions. To date, a cumulative
$74 billion of government bonds issued by the Australian Government and the states and territories
have been purchased under the initial $100 billion program. A further $100 billion will be
purchased following the completion of the initial program and the Bank is prepared to do more if that is
necessary. Authorised deposit-taking institutions have drawn $91 billion under the Term Funding
Facility and have access to a further $94 billion. Since the start of 2020, the RBA’s balance
sheet has increased by around $175 billion.
The Board remains committed to maintaining highly supportive monetary conditions until its goals are
achieved. The Board will not increase the cash rate until actual inflation is sustainably within the
2 to 3 per cent target range. For this to occur, wages growth will have to be materially
higher than it is currently. This will require significant gains in employment and a return to a tight
labour market. The Board does not expect these conditions to be met until 2024 at the earliest.