RBA lifts outlook, to review YCC in July

AUSTRALIA’s central bank upgraded its economic outlook and said policy makers will review its bond programs in July, while maintaining interest rates will remain at emergency levels until at least 2024.

Reserve Bank of Australia (RBA) Governor Philip Lowe kept the cash rate and three-year yield target at 0.10% on Tuesday. He said the board will decide at its July 6 meeting on a third tranche of quantitative easing and whether to shift yield curve control (YCC) to target the November 2024 maturity from the current April 2024 bond.

“Despite the strong recovery in economic activity, the recent CPI data confirmed that inflation pressures remain subdued,” Mr. Lowe said in a statement. “The board is prepared to undertake further bond purchases to assist with progress toward the goals of full employment and inflation. The board places a high priority on a return to full employment.”

The RBA’s decision to stand still comes a week before the government delivers its annual budget that’s expected to include targeted spending to help boost jobs and spur a faster recovery. Treasurer Josh Frydenberg has lined up behind Mr. Lowe’s goal of pushing the economy to full employment as quickly as possible to rekindle inflation.

Mr. Lowe said the bank’s central scenario for GDP growth was revised up, with an expansion of 4.75% now expected this year and 3.5% over 2022. Unemployment is expected to continue to decline to around 5% at the end of this year and around 4.5% at the end of 2022.

Australia’s jobless rate has already declined almost 2 percentage points from its pandemic-peak in July last year. The RBA estimates it probably needs to fall closer to 4% before wage growth accelerates.

The central bank releases its quarterly Statement on Monetary Policy with the full suite of economic forecasts on Friday, and Deputy Governor Guy Debelle is due to speak in the mining-centered state capital Perth the night before that.

“Moving in July means this week’s quarterly SoMP will be the last one before” the YCC and QE3 decisions, said Ben Jarman, a senior economist at JPMorgan Chase & Co. in Sydney. “So the staff’s forecasts for wages — and the upside scenario — in that document will be important.”

While Australia has experienced a sharp V-shaped recovery, the RBA shows no sign of following the Bank of Canada in early withdrawal of stimulus. Instead, like the Federal Reserve and European Central Bank, it will keep pumping monetary support until the economy is fully repaired. It would also like to trail any move by the US to avoid unnecessary exchange rate appreciation.

“The RBA continues to mirror the US Fed — acknowledging an improved outlook but arguing that further progress is required,” said Kellie Wood, fixed income portfolio manager at Schroder Investment Management. “Lowe is on a mission to see how tight the labor market can get before inflation picks up meaningfully.”

The one area likely causing a headache for Mr. Lowe is the property market. Housing has surged in response to record low borrowing costs, government assistance and a lack of supply. Property prices rose 7.8% in the past year, and while similar increases have occurred across the globe, a return to boom times Down Under threatens to swell an already worrisome pile of household debt.

“The bank will be monitoring trends in housing borrowing carefully,” the governor said today. “It is important that lending standards are maintained.”

The government’s budget next Tuesday is likely to show an improved bottom line due to better employment outcomes that boost the tax take and cut welfare costs. It’s similarly benefited from the high price of iron ore, the nation’s largest export. The steelmaking ingredient is currently trading at around $190 and Citigroup, Inc. is forecasting an extended shortfall in the commodity and expects new highs of $200 to be hit over the next few weeks. — Bloomberg