At its meeting today, the Board decided to maintain the current policy settings, including the targets
of 10 basis points for the cash rate and the yield on 3-year Australian Government bonds, as well
as the parameters of the Term Funding Facility and the government bond purchase program.
Globally, the news has been mixed recently. On the one hand, infection rates have risen sharply in
Europe and the United States and the recoveries in these economies have lost momentum. On the other
hand, there has been positive news on the vaccine front, which should support the recovery of the global
economy. The recovery is also dependent on ongoing support from both fiscal and monetary policy. Hours
worked in most countries remain noticeably below pre-pandemic levels and inflation is low and below
central bank targets.
Financial conditions remain accommodative around the world, with bond yields near historically low
levels. The positive news on vaccines has boosted equity markets, lowered risk premiums and supported
further increases in some commodity prices. The improvement in risk sentiment has also been associated
with a depreciation of the US dollar and an appreciation of the Australian dollar.
In Australia, the economic recovery is under way and recent data have generally been better than
expected. This is good news, but the recovery is still expected to be uneven and drawn out and it
remains dependent on significant policy support. In the RBA’s central scenario, it will not be
until the end of 2021 that the level of GDP reaches the level attained at the end of 2019. In the
central scenario, GDP is expected to grow by around 5 per cent next year and
4 per cent over 2022.
Employment growth was again strong in October, although the unemployment rate increased to
7 per cent as more people rejoined the workforce. A further rise in the unemployment rate is still
expected, as businesses restructure in response to the pandemic and more people rejoin the workforce.
The unemployment rate is forecast to decline next year, but only slowly and still to be around
6 per cent at the end of 2022.
The extended period of high unemployment and excess capacity is expected to result in subdued increases
in wages and prices over coming years. In the September quarter, the Wage Price Index increased by just
0.1 per cent, to be 1.4 per cent higher over the year. In underlying terms,
inflation is forecast to be 1 per cent in 2021 and 1½ per cent in 2022.
The Board views addressing the high rate of unemployment as an important national priority. Its policy
decisions over recent months will help here. These decisions are complementary to the significant steps
taken by Australian governments to support jobs and economic growth.
The Bank’s policy response has lowered interest rates across the yield curve, which will assist
the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than
otherwise; and supporting asset prices and balance sheets. The Term Funding Facility is also supporting
the supply of credit to businesses. To date, authorised deposit-taking institutions have drawn down
$84 billion under this facility and have access to a further $105 billion. Over the past
month, the Bank has bought $19 billion of government bonds under the bond purchase program and a
further $5 billion of Australian government securities in support of the 3-year yield target. Since
the start of this year, the RBA’s balance sheet has increased by around $130 billion.
Given the outlook for both employment and inflation, monetary and fiscal support will be required for
some time. For its part, 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. Given the outlook, the Board is not expecting to increase the cash rate for at
least 3 years. The Board will keep the size of the bond purchase program under review, particularly
in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if
necessary.
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