Australia’s central bank is approaching a decision on whether the economy is strong enough for it to join Canada and New Zealand in signaling a move away from emergency mode.
While no change in policy settings is expected at Tuesday’s meeting, the Reserve Bank will likely hold preliminary discussions on whether to extend the three-year yield target and undertake further quantitative easing. Governor Philip Lowe said the board will make a call on both in July.
The strength of recent economic data suggests the central bank could opt against rolling its yield target maturity to November 2024 from April 2024 and taper purchases under its longer-dated bond buying program. Melbourne’s latest Covid-19 outbreak is a reminder that a sluggish vaccine roll-out has the potential to jeopardize the recovery.
“Covid hasn’t gone away, so that’s still the risk that bubbles around in the background,” said Gareth Aird of Commonwealth Bank of Australia. “But if you park that to one side, you couldn’t really ask for a better economic backdrop at the moment to try and meet the RBA’s objectives.”
Central banks are beginning to edge away from their emergency monetary settings as vaccine roll-outs continue and economies reopen. The Reserve Bank of New Zealand surprised markets last week in presenting an outlook with projections of its official cash rate rising in the second half of next year.
The RBA slightly shifted its tone in this month’s quarterly update as it lifted the economic outlook to reflect strong hiring, investment intentions and sentiment, while maintaining that it doesn’t expect to hike rates until 2024. A commitment to this dovish stance is keeping a lid on any currency appreciation, especially as other central banks pivot.
Meantime, Australia’s gross domestic product data for the first three months of the year is due Wednesday. Economists estimate the economy expanded 1.1% from the prior quarter. The economy has rapidly recovered, but covid remains an ever present risk for a country heading into the Southern Hemisphere winter.
What Bloomberg Economics Says…
“A snap lockdown in Australia’s second-most populous state, Victoria, is likely to dent the recovery. Uncertainty may dent business and consumer sentiment across unaffected regions, and could weigh on the recovery in business investment.”
— James McIntyre, economist
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The RBA is currently running a three-year yield target at 0.1% — the same level as the cash rate — and will decide at its July 6 meeting whether to roll it over. A decision to let it lapse would signal greater confidence in the outlook. Similarly, the bank needs to decide if it will extend its QE program that is currently due to expire in September.
Lowe says wages growth will need to rise at a pace faster than 3% — more than double the current rate — for inflation to return sustainably to the central bank’s 2-3% target before he raises rates.
Anecdotal evidence of labor shortages are growing in Australia, in a signal that employers may need to offer higher wages to attract workers. The government is also trying to help the RBA push down unemployment and boost wages with targeted fiscal assistance.
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