RBA Holds Cash Rate at Record Low, But Moves to Taper Monetary Stimulus

The Reserve Bank of Australia (RBA) has decided to hold the cash rate at a record low of 0.1 percent, reiterating its expectation to keep it unchanged until 2024. However, the central bank will scale back its response to the stronger-than-expected economic recovery.

The change means the RBA  is tapering off its massive monetary stimulus from its weekly government bond purchase, which will drop from $5 billion (US$3.7 billion) to $4 billion (US$2.9 billion), in early September after the completion of the current 12-month long $200 billion  (US$159 billion) stimulus program.

In a statement, the RBA said that it remains committed to providing continuing monetary support for the economy so it can return to full employment and higher inflation.

“The Board is committed to achieving the goals of full employment and inflation consistent with the target,” the statement says. “Today’s decisions, together with those taken previously, have the economy on a path to achieve those objectives.”

In line with this stance, the RBA has also decided to maintain the three-year bond yield target at 0.1 percent to keep funding costs low.

While acknowledging the job recovery momentum and reports of labour shortages, the RBA said they expect that overall wage pickup will be only “gradual and modest” in the coming months, this means that they do not foresee the cash rate going up until 2024—when the underlying inflation rate is sustainably within two to three percent target range.

The Bank also explained that such an inflation target would require wage growth to exceed three percent.

“The Bank’s central scenario for the economy is that this condition will not be met before 2024,” it said. “Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.”

The non-accelerating inflation rate of unemployment, or NAIRU (the point at which tightness in the labour market starts pushing up wages), is believed to be somewhere between 4 percent and 5 percent.

The RBA estimates that the rate will need to stay around four percent to generate wage and inflation pressures.

Strong Labour Market Could Place Upward Pressure on Wages and Inflations

However, a string of upbeat economic data over the last few months suggests that the rapid fall in unemployment could continue to outpace the RBA forecasts and put upward pressure on wages earlier than expected.

In May, the unemployment rate dropped to pre-pandemic levels of 5.1 percent, and job vacancies jumped to a record high of 362,000, with nearly a quarter of businesses surveyed by the Australian Bureau of Statistics reporting at least one job vacancy.

One of Australia’s leading economists, Saul Eslake, predicates that the current momentum in the labour market is likely to lead to an earlier rate hike.

“While I absolutely agree with the RBA’s judgement that rates should remain where they are until the labour market is sufficiently tight to generate wages growth … I think these conditions are likely to be met much earlier than ‘2024 at the earliest’ as the RBA has been saying repeatedly since early this year,” Eslake told the Epoch Times in an email.

Eslake contributes the better-than-expected unemployment rate to Australia’s border closure policy, which he believes has created an “artificial boost” to domestic spending of more than A$50 billion (US$37.4 billion) per year from Australians who can’t spend abroad.

“The closure of Australia’s borders means that it’s much easier to reduce unemployment for any given rate of jobs growth,” he said.

However,  Richard Holden,  Professor of Economics at UNSW Business School, disagrees with Eslake on the point. He argues that while immigration plays an important role, it is mainly to fill skill gaps.

“I would be surprised if the border reopening led to an uptick in unemployment,” he said. “Perhaps the opposite is more likely with businesses being able to expand more and employ more domestic workers as well.”

Holden also believes that the RBA cash rate should not go up earlier than expected as “it would be very bad for the economy.”

“Let’s get unemployment down to 4 percent and see what happens to inflation,” he said.


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