Australia central bank maintains its policy as bond target looms

Bloomberg

Australia’s central bank maintained its policy settings as it prepares to decide on extending its yield target and quantitative easing programs, with a Covid-19 lockdown complicating the outlook.
The Reserve Bank of Australia kept the cash rate and three-year yield target at 0.10% in Sydney on Tuesday, as expected. It will make a decision in July on whether to extend the yield target and undertake further quantitative easing. A weeklong shutdown in the nation’s second-largest city adds a layer of uncertainty to the outlook.
“Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued,” Governor Philip Lowe said. “The board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and the inflation consistent with the target.”
The case for Lowe to maintain the April 2024 bond as the target maturity had been strengthening amid strong hiring, sentiment and investment plans. This was reinforced by the government keeping open the fiscal spigot in the May budget as it joins the RBA in seeking to drive down unemployment to revive wages growth and inflation.
“Progress in reducing unemployment has been faster than expected,” Lowe said in his statement. “There are reports of labor shortages in some parts of the economy.”
Yet the RBA may be encouraged to err on the side of caution if Melbourne’s outbreak worsens and extend both of its bond programs to keep maximum support for the economy.
“An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, although this should diminish as more of the population is vaccinated,” Lowe said. “The board continues to place a high priority on a return to full employment.”
Globally, central banks are beginning to edge away from emergency monetary settings. The Reserve Bank of New Zealand surprised markets last week in presenting projections of its official cash rate rising in the second half of next year.
Back in Australia, economists predicted ahead of data on Wednesday that gross domestic product rises 1.5% in the first three months of the year from the prior quarter, and advanced 0.6% from a year earlier.
Treasury Secretary Steven Kennedy, in testimony to a parliamentary panel, said partial data showed around 56,000 workers had lost their jobs in the four weeks following the end of the government’s JobKeeper wage subsidy that expired March 28.
He said strong employment data and forward indicators “continue to give us confidence that the labor market has the underlying strength to absorb workers transitioning off the JobKeeper payment.”
Lowe estimates Australia’s jobless rate will need to fall to close to 4% before driving economy-wide pay increases. It stood at 5.5% in April.
The governor expects wages growth will need to rise at a pace faster than 3% — more than double the current rate — for inflation to return sustainably to the central bank’s 2-3% target.
Lowe reiterated that “this is unlikely to be until 2024 at the earliest.”