RBA leaves cash rate at record low

The Reserve Bank of Australia has left its key interest rates, including the cash rate, unchanged at a record low 0.1 per cent as widely anticipated by economists.

Following its monthly board meeting on Tuesday, central bank governor Philip Lowe said the economic recovery is well under way and has been stronger than was earlier expected.

“The current monetary policy settings are continuing to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets,” Dr Lowe said in a statement.

The board also left its three-year bond yield target and the rate for its term funding facility for banks at the record low 0.1 per cent.

Dr Lowe reiterated that the board will not increase the cash rate until inflation is sustainably within the two to three per cent target range, conditions it does not expect to be met until 2024 at the earliest.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.”

However, financial markets have recently appeared sceptical of such an outlook, with interest rates, or yields, on government bonds factoring in rate hikes by the end of 2023.

Global bond yields have risen sharply in recent weeks on the view that the world economy will recover from the COVID-19 induced recession quicker than first thought, fuelling inflation.

Such market action runs at odds with what the RBA and other central banks are trying to achieve through massive bond buying programs, otherwise known as quantitative easing, aimed at keeping market interest rates, and in turn borrowing costs, low.

“The bank remains committed to the three-year yield target and recently purchased bonds to support the target and will continue to do so as necessary,” Dr Lowe said.

“Also, bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market.The bank is prepared to make further adjustments to its purchases in response to market conditions.”

At its February board meeting, the RBA also unexpectedly announced it will purchase an additional $100 billion in government and state bonds when an existing program ends in mid-April.

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