Australia central bank maintains policy as bond target looms

Sydney

AUSTRALIA'S central bank maintained its policy settings as it prepares to decide on extending its yield target and quantitative easing programmes, with a Covid-19 lockdown complicating the outlook.

The Reserve Bank of Australia (RBA) kept the cash rate and three-year yield target at 0.10 per cent in Sydney on Tuesday, as expected. It will decide in July 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 inflation consistent with the target." The Australian dollar edged lower, trading at 77.41 US cents at 2:53pm in Sydney from 77.62 cents just before the release.

The case for Mr 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," Mr Lowe said. "There are reports of labour shortages in some parts of the economy."

Yet the RBA may be encouraged to extend both its bond programmes if Melbourne's outbreak worsens, to maintain 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," Mr Lowe said.

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.

In Australia, economists predicted ahead of data on Wednesday that gross domestic product rose 1.5 per cent in the first three months of 2021 from the prior quarter.

Treasury Secretary Steven Kennedy, in testimony to a parliamentary panel on Tuesday, 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 "give us confidence that the labour market has the underlying strength to absorb workers transitioning off the JobKeeper payment".

Governor Lowe estimates Australia's jobless rate will need to fall to close to 4 per cent - from 5.5 per cent in April - before driving economy-wide pay increases. He expects wages growth will need to increase at a pace faster than 3 per cent - more than double the current rate - for inflation to return sustainably to the central bank's 2-3 per cent target. He reiterated that "this is unlikely to be until 2024 at the earliest". BLOOMBERG