RBA Keeps Rates Unchanged and Turns all Eyes to July Meeting

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RBA Keeps Rates Unchanged and Turns all Eyes to July Meeting

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  • The RBA has held the cash rate at 0.1%.
  • No explicit mention of bond-buying extensions were made.
  • The Australian economy grew 1.8 per cent in the March quarter of 2021.

Like many central banks across the world, the Reserve Bank of Australia has its hands tied for the short and medium-term, with pressure by the financial markets, governments, and the general public to support a low-interest-rate environment for the coming years. The Australian economy has powered ahead since the cash rate was officially cut to record lows of 0.1%, recovering at a rate far beyond consensus estimates.

The only minor concern addressed, were reports of “labor shortages in some parts of the economy.” Despite this, the unemployment rate currently sits at 5.5 per cent, a faster than expected return to normal, even with international borders remaining closed.

Another major narrative gripping global markets is that of inflation. RBA Governor Phillip Lowe has commented how “While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest.” Wage growth is currently holding back inflation, with current pressures remaining subdued.

When it comes to quantitative easing, financial markets were awakened by the potential of an extension of the RBA’s current asset purchase program. The RBA alluded to an extension of the program beyond September in the realms of $200 billion.

Following the Reserve Banks meeting yesterday, the Australian Bureau of Statistics (ABS) today released the March Quarter Gross Domestic Product (GDP) growth. During the period, GDP growth rose 1.8 per cent, taking annual growth to 1.1 per cent above analysts’ expectations for the period 1.5 and 0.6 per cent. Following the release, the Australian dollar ticked slightly higher, now buying 77.71 US cents.

This growth is driven by the robust economic recovery economy-wide and elevated commodity prices such as Iron Ore, Nickel and Copper. Strong demand for these commodities combined with supply-side concerns have assisted them in reaching all-time highs. Recent data showed that Australia’s current account surplus had reached $18.3 billion during the March Quarter, a $2.3 billion increase against the previous quarter.

Moving forward, with little surprises in the recently released data, all attention has been shifted towards the July meeting in five weeks’ time. There the RBA will decide what bond it will use to direct its 3-year yield target. Seemingly unimportant decision likwe this are the reason why rising bond yields have threatened equity markets in recent months. The second major decision will have to be the extension of its Quantitative Easing program beyond September.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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