The Reserve Bank of Australia (RBA) made its first cash rate announcement for 2021 this afternoon.
And the RBA opted to — drum roll please — keep rates on hold at the current record low 0.1%.
Atop of maintaining the current cash rate and the parameters of its Term Funding Facility, RBA Governor, Philip Lowe, also announced the central bank will up its quantitative easing (QE) program.
The RBA will purchase another $100 billion of bonds issued by both the state, territory, and federal governments once the current bond purchases run their course in mid-April.
Lowe wrote that the RBA will continue buying $5 billion of government bonds per week. This is the same rate as under the current program.
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COVID-19 vaccine tailwinds
Lowe noted that the rapid development of COVID-19 vaccines had improved the outlook for the global economy over the past months.
In Australia, which has done particularly well managing the pandemic, that recovery has seen unemployment fall to 6.6%, below earlier projections. The RBA forecasts Australia's unemployment rate will remain higher than it's been over the past 20 years. Its base case scenario sees unemployment falling to around 6% by years end and to 5.5% by the end of 2022.
In other positive news, retail spending has also come back strongly. This is due to many households and businesses now repaying earlier deferred loans. The RBA's central scenario now sees GDP growing by 3.5% in 2021 and at that same rate in 2022. GDP is forecast to reach its end of 2019 level by mid-2021.
However, the RBA governor cautioned that Australia's economic recovery "remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets."
Wage growth
Inflation (CPI) came in at 0.9% over the year to the December quarter. Wage growth also remains poor. According to the Wage Price Index figures, wages are increasing at the slowest rate in history. The central bank predicts a gradual increase in both inflation and wages. However, it believes both will be below 2% "over the next couple of years".
As far as increasing the interest or tightening its other policies, Lowe highlighted that this is still a long way off:
The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. Given the current outlook for inflation and jobs, this is still some way off…
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.
Tomorrow, Lowe is scheduled to address the National Press Club in Canberra. Lowe is said to reveal further details on the RBA's expectations for the Australian economy.
How ASX 200 shares moved following the RBA's announcement
There was no significant rise in the S&P/ASX 200 Index (ASX: XJO) following the release of the RBA's decision at 2:00pm AEST.
Investors look to have expected the news. A rate rise was highly unlikely, and a rate cut impossible without going negative.
The ASX 200 is up 0.1% since the RBA announced its decision. That puts the index up 1.4% for the day in late afternoon trading.
