RBA leaves interest rates at record low

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

 

The Reserve Bank has left its cash rate unchanged at a record low in its first board meeting of the year, but agreed to extend its bond buying program beyond April to keep long-term interest rates low.

The central bank’s key cash rate has been 0.1 per cent since November.

“The economic recovery is well under way and has been stronger than was earlier expected,” Reserve Bank governor Philip Lowe said in his post-meeting statement on Tuesday.

But he reiterated the board will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range.

“For this to occur, wages growth will have to be materially higher than it is currently,” Dr Lowe said.

“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, a year later than it had previously envisaged.

The Reserve Bank’s three-yield bond target rate – that aims to keep short-term market interest rates low – and its term funding facility for banks, were also kept at 0.1 per cent.

Dr Lowe also announced the central bank would purchase an additional $100 billion of bonds when the current bond purchase program is completed in mid-April.

The RBA has bought a cumulative $52 billion of government bonds issued by the Australian government and the states and territories under the bond purchase program so far.

This quantitative easing program aims to keep long-term market interest rates, and in turn borrowing rates, low.

Dr Lowe said the central scenario is for economic growth to return to its pre-pandemic level by the middle of the year and grow by 3.5 per cent over both 2021 and 2022.

“Even so, the economy is expected to operate with considerable spare capacity for some time to come,” he said.

“The unemployment rate remains higher than it has been for the past two decades and while it is expected to decline, the central scenario is for unemployment to be around six per cent at the end of this year and 5.5 per cent at the end of 2022.”

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