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Australia Monetary Policy August 2021

Australia: RBA holds its ground in August

At its monetary policy meeting on 3 August, the Reserve Bank of Australia (RBA) decided to keep the cash rate unchanged at the all-time low of 0.10%. It also left the target for three-year government bond yields at around 0.10%, and stated it will continue purchasing government bonds until at least mid-November in order to keep funding costs low.

The decision was driven by the Bank’s assessment that underlying price pressures remain low, despite the recent rise in headline inflation due to the unwinding of some earlier Covid-19-related price declines. While the Bank noted that a pickup in wage growth and underlying inflation is expected, it projects both factors to take some years before feeding through into price pressures consistent with the inflation target.

The Bank maintained a dovish stance in its communiqué, stating that it is “committed to maintaining highly accommodative monetary conditions to support a return to full employment”. Moreover, the Bank explicitly ruled out hiking the cash rate before inflation establishes itself within the 2.0%–3.0% target range, which it does not expect to happen before 2024. As such, all of our panelists see the cash rate remaining at 0.10% for the rest of this year.

Lee Sue Ann, economist at United Overseas Bank, said:

“While Australia’s economic recovery has unfolded at a rapid pace, we see the need for ongoing monetary policy support for some time, with unemployment still likely around 1.0 ppt above the level consistent with full employment. On our forecasts, we have core inflation returning to the RBA’s target band by early 2023 but wage growth not reaching 3% until much later in 2023. With the RBA reiterating that inflation would need to sustainably be in the target band, and allowing for it to take some time to make such an assessment, we see some risk of a rate rise in late 2023 but more likely for the first hike to occur only in 2024.”

The next monetary policy meeting is scheduled for 7 September.

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