Reserve Bank of Australia Eases Policy Further… Not a Surprise

November 3, 2020

Policymakers at the Reserve Bank of Australia enacted their first Overnight Cash Rate (OCR) cut since March and introduced a program of government bond purchases, which will total A$ 100 billion over the coming six months and likely continue longer. Although the short-term economic outlook is better than at the time of the last full review three months ago, it’s become apparent that the medium-term prospects for recovery from the severe recession brought on by the pandemic is going to be “uneven and drawn out.” Today’s announced actions to lower the entire Australian yield curve are meant to complement fiscal policy stimulus and particularly to lend support to job creation and overall recovery in economic activity.

So the OCR, which was cut twice in March by 25 basis points each time, now falls to a record low of 0.10%. Target yields for 3-year sovereign debt and the Term Funding Facility also drop to 0.1%, while the rate on Exchange Settlement Balances falls 10 basis points to zero percent. And while job creation is the top short-term policy priority, the RBA’s statement after today’s meeting underscores that the inflation target of 1-3% remains the “cornerstone of the monetary policy framework.”

For now, there is no conflict between the two mandates, as officials are projecting very low wage and price inflation in 2021 and 2022. The initial hike of the OCR is likely at least three years away and will not be engineered until actual inflation is sustainably within target and wage growth has materially accelerated as well. The end of quantitative stimulus will precede the first interest rate hike.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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