The Reserve Bank of Australia decided to maintain the Cash Rate at 0.10%, as expected but decided to put an end to their asset-buying program (i.e. money printing) of $4 billion per week.
Interestingly, the Bank took the rather direct measure of very clearly dispelling any views or thoughts that an end to the asset-buying program would give a green light to near-term rate rises. They made it abundantly clear (literally spelled it out) in no uncertain terms that they will not increase the cash rate until actual inflation is sustainably within the 2-3% target range and that it was way too early to conclude that it was already sustainably within the band. They reiterated the uncertainties regarding how persistent high inflation will be given most of it is being caused by supply-side factors linked to the Covid health policy response.
Wages growth is what they’re focused on, with current growth alone not sufficient to meet their inflation targets.
Other notable mentions included:
  • GDP (economic) growth forecast of 4.25% in 2022 and 2% in 2023, with 2022 growth supported by strong household and business balance sheets, the upswing in business investment, the large pipeline of construction work to come, and supportive macroeconomic settings.
  • The unemployment rate declined to 4.2% and the high number of job vacancies are supportive in the period ahead, with the Bank forecasting an unemployment rate below 4% before year-end and into 2023
  • Wages growth has picked picked-up, but not yet sufficient, with further pick-up expected to be only gradual.
  • Headline inflation of 3.5% being affected by higher petrol prices, higher prices for newly constructed homes, and disruptions to global supply Underlying inflation is 2.6%, but they expect this to rise to 3.25% in the coming quarters.
  • Financial conditions in the economy remain accommodative, with a weaker dollar helping
  • Asset buying program (money printing) to end with the Bank’s balance sheet more than tripling to $640 billion since the start of the
Markets reacted to the news positively as the Bank’s statement was clearly more dovish than expected. Australian equities rose, the Australian dollar fell, and Australian government bond yields fell (prices higher).
Our reaction was neutral in that we felt this is what the Bank needed to do, especially in relation to calming fears regarding earlier and faster than expected rate rises. Ending the asset-buying program makes sense. We remain watchful of inflation and any changes in the Bank's rhetoric.