RBA eschews further monetary stimulus – where to now?


Not surprisingly at yesterday’s Board meeting the RBA eschewed the application of any further monetary stimulus following the announcement of a comprehensive array of measures in November.

However, it reiterated that the likelihood of an uneven recovery and a concern about ongoing high unemployment and associated subdued wage growth would mean that policy settings remain accommodative for an extended period of time. Dr Lowe stated that:

“…[t]he Board views addressing the high rate of unemployment as an important national priority.”

He goes on to say that: “Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time. For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”

And further that: “… the Board is not expecting to increase the cash rate for at least 3 years…[and] is prepared to do more if necessary.”

By waiting until actual inflation is within the 2 to 3 per cent range, the Governor’s Statement indicates that the RBA had effectively moved to address the exchange rate consequences of the ‘flexible’ inflation targeting regime adopted by the Federal Reserve and other central banks.

Having said that there was little by way of overt concern that the  AUD had risen since the November meeting. Despite an unambiguous commitment to the application of extended stimulus, the Governor did acknowledge some positive news on the development of COVID vaccines, noting such developments had:

“…boosted equity markets, lowered risk premiums and supported further increases in some commodity prices[and had] also been associated with a depreciation of the US dollar and an appreciation of the Australian dollar.”

The apparent lack of handwringing from Martin Place on the AUD probably reflects an assessment that, the RBA’s November measures notwithstanding, one might argue that the AUD should arguably be a little stronger.

The overarching message, however, is that accommodative policy is here for an extended period and is firmly focussed on returning the economy to full employment and wage outcomes consistent with inflation comfortably within the 2-3 per cent band.

By Stephen Miller, investment strategy consultant

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