Australia’s central bank maintained its policy settings as it prepares to decide on extending its yield target and quantitative easing programs, with a COVID-19 lockdown complicating the outlook.
The Reserve Bank of Australia yesterday kept the cash rate and three-year yield target at 0.10 percent, as expected.
It is to decide next month whether to extend the yield target and undertake further quantitative easing.
A week-long shutdown in Melbourne adds a layer of uncertainty to the outlook.
“Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued,” Reserve Bank of Austral 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.”
“Progress in reducing unemployment has been faster than expected,” Lowe said in his statement. “There are reports of labor shortages in some parts of the economy.”
However, the central bank might be encouraged to err on the side of caution if Melbourne’s outbreak worsens and extend both of its bond programs to keep 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,” Lowe said. “The board continues to place a high priority on a return to full employment.”
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.
Australian Secretary to the Treasury Steven Kennedy, in testimony to a parliamentary panel earlier yesterday, said partial data showed that about 56,000 workers had lost their jobs in the four weeks following the end of the government’s JobKeeper wage subsidy, which expired on March 28.
He said that strong employment data and forward indicators “continue to give us confidence that the labor market has the underlying strength to absorb workers transitioning off the JobKeeper payment.”
Lowe estimated that Australia’s jobless rate would need to fall to close to 4 percent before driving economy-wide pay increases.
Unemployment stood at 5.5 percent in April.
The governor expects wage growth would need to increase at a pace faster than 3 percent — more than double the current rate — for inflation to return sustainably to the central bank’s target of 2 to 3 percent.
Lowe reiterated that “this is unlikely to be until 2024 at the earliest.”
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