Australia's central bank left its key interest rate steady, as widely expected, but took two steps toward rolling back its extraordinary easy monetary policy as the economy and labour market continues to recover faster-than-expected from the COVID-19 pandemic.
The Reserve Bank of Australia (RBA) left its benchmark cash rate target at 0.10 percent, unchanged since November 2020 when it was lowered for the third time that year to cushion economic activity from the impact of the COVID-19 pandemic.
The Reserve Bank of Australia (RBA) left its benchmark cash rate target at 0.10 percent, unchanged since November 2020 when it was lowered for the third time that year to cushion economic activity from the impact of the COVID-19 pandemic.
In addition to the rate cuts, RBA in March last year took a page out of the Bank of Japan's playbook and began targeting a yield of 0.10 percent on a 3-year benchmark government bond and in November embarked on quantitative easing by buying government bonds.
RBA has been in a lengthy but continuous easing cycle since November 2011, cutting the rate 18 times and by 4.65 percentage since then.
Helped by a combination of rising exports of commodities, fiscal and monetary stimulus, Australia's economy is now bouncing back from the pandemic, unemployment is falling and inflation rising.
"The economic recovery in Australia is stronger than earlier expected and is forecast to continue," RBA said, raising its forecast for inflation in coming months.
However, RBA also affirmed it was committed to maintaining "highly supportive monetary conditions" to ensure Australia returns to full employment and inflation meets its target.
The bank's board once again said it would not raise its cash rate until actual inflation is sustainably within its 2.0 to 3.0 percent target range and it doesn't expect this to happen before 2024.
But RBA also began rolling back some its crises measures, with the board deciding to keep the April 2024 bond as its target bond rather than extend the horizon to the November 2024 bond, which means the maturity of its yield target gradually declines.
"The situation today is quite different from that in March last year; we are no longer looking over a cliff but instead transitioning from recovery to expansion," RBA Governor Philip Lowe said, adding the improved economy has widened the range of plausible scenarios for the cash rate.
"This means that probabilities have shifted and the decision to adjust the approach to the yield target reflects this shift in probabilities," Lowe said, adding the yield target had proved to be a successful monetary policy measures and helped lower funding costs.
The RBA's second A$100 billion tranche of bond purchases will be completed in early September and while it plans to continue buying bonds after this date, the weekly purchases will be lowered to $4 billion from the current $5 billion.
In November the board will again review the rate of its purchases as it balances the benefit of responding in a timely way to the flow of economic news while providing financial markets with guidance about its future purchases.
"We will continue buying bonds until there is further material progress towards the goals for full employment and inflation," Lowe said, with the RBA wanting to see clear evidence the stronger economy is translating into a pickup in aggregate wage growth and a lift in inflation towards the target.
Australia's inflation rate rose to 1.1 percent in the first quarter from 0.9 percent in the fourth quarter and RBA raised its forecast for inflation to rise temporarily to about 3.5 percent to the June quarter from last month's forecast of over 3.0 percent.
But underlying inflation is still seen averaging 1.5 percent this year and 2 percent by mid-2023.
