Reserve Bank of Australia Lays Out a Long Path Before a First Interest Rate Hike

February 2, 2021

After customarily skipping of a January Board meeting, monthly policy reviews resumed in Australia where officials agreed to leave their Official Cash Rate unchanged at a record low of 0.1% where such has been since a 15-basis point in November. The OCR previously in 2020 had been cut twice in March by 25 basis points each time. The Reserve Bank of Australia is also conducting Aussie government bond purchases to keep its yield also near 0.1% and is doing such at a rate of A$ 5 billion per week. Governor Lowe’s statement explaining the decision notes that ” Australia’s success on the health front and the very significant fiscal and monetary support” have resulted in faster-than-expected economic recovery and projects 3.5% growth both this year and next with core CPI inflation of 1.25% in 2021 followed by 1.5% in 2022. The statement concludes with fairly explicit forward guidance that puts off an interest rate for about three years.

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.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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