RBA Keeps Rates, Extends QE

Reserve Bank of Australia (RBA)

The central bank's duty is to contribute to the stability of the currency (AUD), full employment, and the economic prosperity and welfare of the Australian people. It does this by conducting monetary policy to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation's banknotes.

The RBA seeks to keep consumer price inflation in the economy to 2–3%, on average, over the medium term. Over recent decades, the bank has targeted the cash rate – the rate charged on overnight loans between commercial banks. Additionally, since March 2020 the Reserve Bank has also been targeting the yield on the 3-year Australian Government bond to help lower funding costs across the economy

Under its current Governor Philip Lowe, who assumed office in the second half of 2016, the bank seemed to have been focusing more on employment, compared to what it had been doing in the past. This became evident in the post-COVID era, with the Governor's address on the Committee for Economic Development of Australia Annual Dinner in November 2020.

Mr Lowe said that there has been "a shift in the relative weight given to jobs and inflation in our communication" and that "the Board wants to do what it can, with the tools that it has, to support the national effort to reduce unemployment".

Recent Monetary Policy Decisions

The Reserve Bank of Australia, slashed interest rates by 25 basis points (to 0.50%) on March 3rd 2020, in what we view as a slow reaction to the COVID outbreak, before cutting another 0.25% and launching a Quantitative Easing program (QE) in an extraordinary meeting later in that same month.

The central bank further reduced rates to the current 0.10% in November 2020 and also announced the purchase of AU$100 billion of government bonds over the following six months.

In its first meeting of 2021 in February, policymakers announced additional asset purchases of $100 billion – to begin after the completion of the current program (in mid April) - at a rate of of AU$5 billion/week.

RBA Stays Dovish

In yesterday's meeting (July 6th 2021), officials opted to maintain the cash rate target at 0.1%. Furthermore, the bank announced that it will continue buying bonds after the completion of the current program in early September, but will do so at a lower the pace of AU$4 billion/week due to the faster than expected recovery. This will go on at least until mid-November, when policymakers will conduct a further review of the Quantitative Easing program.

Despite acknowledging Australia's robust economic recovery, RBA stayed on its dovish path by extending the Quantitative Easing program beyond its September deadline, albeit at a reduced pace. More to it, officials reiterated that they will not increase rates until actual inflation is sustainably within the 2-3% range – a target that it still expects to not be met before 2024.

This stance is in stark contrast with its New Zealand counterpart (RBNZ), which recently projected higher interest rates within the next year.