At the first meeting of the year, Australia’s central bank raised the size of its asset purchase programme and signaled that it will not hike interest rates until 2024.
The policy board of the Reserve Bank of Australia headed by Governor Philip Lowe decided on Tuesday to leave its cash rate unchanged at a record low of 0.10 percent.
The central bank retained the target yield on the 3-year Australian government bond at around 0.1 percent and also maintained the parameters of the Term Funding Facility.
But, policymakers decided to buy an additional A$100 billion of bonds issued by the Australian government and states and territories when the program is completed in mid-April. These additional purchases will be at the current rate of A$5 billion a week.
“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range. For this to occur, wages growth will have to be materially higher than it is currently,” the bank said.
This will require significant gains in employment and a return to a tight labor market. The board does not expect these conditions to be met until 2024 at the earliest, policymakers observed.
Both inflation and wages growth are forecast to pick up, but to do so only gradually, with both remaining below 2 percent over the next couple of years, the board said. In underlying terms, inflation is expected to be 1.25 percent over 2021 and 1.5 percent over 2022.
Policymakers expect the economic recovery to continue, with the central scenario being for GDP to grow by 3.5 percent over both 2021 and 2022. GDP is expected to return to its end-2019 level by the middle of this year.
Nonetheless, the economy is set to operate with considerable spare capacity for some time to come, policymakers noted.
The unemployment rate is forecast to fall, and the central scenario is for unemployment to be around 6 percent at the end of this year and 5.5 percent at the end of 2022.
More upbeat forecasts for GDP growth, the labor market and inflation suggest that the bank could end its asset purchases later this year, though the Bank’s renewed focus on slow-moving developments in inflation and wage growth may trigger a further extension, Marcel Thieliant, an economist at Capital Economics, said.
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