The Reserve Bank’s decision to end one of its stimulus measures is a good sign, although it may not feel that way for someone sitting on a mortgage bigger than Flemington racecourse.
Ditching its 0.1 per cent target for the yield on three-year Australian government bonds – not quite a water-cooler topic for most but certainly a page-turner for central banking types – was simply recognition that the COVID-19 emergency is over.
RBA governor Philip Lowe says the economy still needs very low interest rates to tighten the jobs market and drive up wages.
The combination of the RBA’s actions and those of all levels of government have supported the economy to the point that it now does not need as much assistance as initially feared.
A key part of that success is the health outcomes enjoyed by all Australians. COVID-19 has not overwhelmed our health systems as we have taken up vaccinations (pushed along by the Delta-related lockdowns of NSW, Victoria and the ACT), reducing the impact of infection for those unlucky enough to come in contact with the virus.
But the important point is that while the RBA board put one of its economic support arrows back in the quiver, it’s still loosing the others like a modern-day Robin Hood.
It will carry on creating $4 billion a week until mid-February to buy government debt, of which it already owns $305 billion and is on track to hold $350 billion.
It still has the official cash rate at 0.1 per cent. As governor Philip Lowe maintained on Tuesday, it is “quite plausible” that we will still have a cash rate of 0.1 per cent in 2024.
And it’s this decision to keep supporting the economy while financial markets and an increasing number of economists believe inflation is just around the corner that has the bank in a bind.
The move to abandon the yield curve target was in effect forced on the RBA by markets, which responded to last week’s higher than expected inflation report by pushing up this key interest point.
The RBA decided not to die on that hill. But it maintains inflation is not about to blow up the country. Lowe’s statement explaining the bank’s thinking on Tuesday explicitly noted “higher petrol prices, higher prices for newly constructed homes and the disruptions in global supply chains” as the main causes.
Petrol prices and global supply chains are beyond the RBA’s control while the bank maintains higher rates might slow house price growth but also drive up unemployment and drive down wages growth.
Wages growth is central to the bank’s thinking at present. It simply does not subscribe to the view that employers – who have kept wages under their heels for the past eight years – are about to lift their feet any time soon.
Lowe told reporters and analysts employers have responded to the tightening jobs market with increased flexibility around hours or one-off bonuses. He clearly wants a jobs market where employers have to offer ongoing, higher wages to get the workers they need.
If wages growth doesn’t hit 3 per cent until 2023, that’s a decade of sub-par wages growth for millions of Australians. They would be the same millions of Australians holding record levels of debt due to the runaway property market, which the bank’s low interest rate settings have inflamed.
The RBA went well outside its comfort zone to support the economy through COVID-19. That was the easy part.
Now the point at which to remove that extraordinary support has been reached. Based on its actions on Tuesday, the bank still plans on firing more monetary policy arrows.
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