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Reserve Bank Board maintains current policy settings and leaves official cash rate on hold

As had widely been expected, the Reserve Bank Board opted to leave interest rates on hold at its meeting today, with the official cash rate remaining at the historic low of 10 basis points.

The Reserve also decided to maintain its current policy settings at today’s meeting, including the yield on the three-year Australian Government bond, as well as the parameters of the Term Funding Facility and the government bond purchase program.

In a statement, the RBA said the rollout of vaccines was supporting an uneven recovery of the global economy.

“While there are still considerable uncertainties regarding the outlook, the central case has improved,” Reserve Bank Governor Dr Philip Lowe said. 

“Global trade has picked up and commodity prices are mostly higher than at the start of the year. Inflation remains low and below central bank targets.”

The RBA said sovereign bond yields had increased in recent months due to the positive news on vaccines and additional fiscal stimulus in the US, and inflation expectations had also lifted from near record lows to become “closer to central banks’ targets”. 

It said housing values had strengthened further, with prices rising in most markets and credit growth to owner-occupiers had picked up, with strong demand from first-home buyers. 

But in contrast, investor credit growth remains subdued. The central bank repeated earlier warnings that it would continue to monitor trends in housing borrowing carefully and to ensure lending standards were maintained.

CEO of mortgage-broking firm homeloanexperts.com.au, Alan Hemmings, said the decision to leave the cash rate on hold “was an expected one, despite concerns around how overheated the property market may become”.

“While the RBA will be watching affordability closely over the next few months and we may see some regulatory measures in the future, it would be premature to increase rates at this stage,” Mr Hemmings said. 

“What I do expect to see is low fixed rates begin to rise as the government slows its term funding facilities for lenders.”

Dr Lowe said the economic recovery in Australia was well under way and remained stronger than had been expected, with the unemployment rate dropping to 5.8 per cent in February and the number of people with a job now back the pre-pandemic level. 

The Reserve also acknowledged GDP had increased by a strong 3.1 per cent in the December quarter, and said the recovery was expected to continue, with above-trend growth this year and next. 

But it also noted wage and price pressures remain subdued and “are expected to remain so for some years”, with the economy still operating with considerable spare capacity and unemployment still too high.

As a result, the Board said it remained committed to maintaining highly supportive monetary conditions until its goals are achieved, with no plans to raise the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. 

Once again, it said a tighter labour market and materially higher wages growth would be required, with the Board not expecting those conditions to be met “until 2024 at the earliest”.

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