Australia's central bank lifts outlook, plans to review bond programmes

Sydney

AUSTRALIA'S central bank upgraded its economic outlook and said policymakers will review its bond programmes in July, while maintaining that 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 per cent 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 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 Australian dollar jumped after the release, before retracing that gain and was buying 77.37 US cents at 3.27pm in Sydney.

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 per cent now expected this year and 3.5 per cent over 2022. Unemployment is expected to continue to decline to around 5 per cent at the end of this year and around 4.5 per cent at the end of 2022.

"The Australian labour market still has a long way to go before it can facilitate the wage growth and inflation that the Reserve Bank seeks," said Callam Pickering, an economist at global jobs website Indeed Inc.

"Realistically, we need an unemployment rate south of 4.5 per cent - currently 5.6 per cent - and an underutilisation rate closer to 11 per cent - currently 13.5 per cent - to achieve that."

The central bank releases its quarterly update with the full suite of economic forecasts on Friday, and deputy governor Guy Debelle is due to speak in the mining-centred state capital Perth the night before that.

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 United States 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 labour 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 per cent 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," Mr Lowe 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 has similarly benefited from the high price of iron ore, the nation's largest export.

The steelmaking ingredient is currently trading at around US$190 and Citigroup Inc is forecasting an extended shortfall in the commodity and expects new highs of US$200 to be hit over the next few weeks. BLOOMBERG