RBA Says Key Consideration for Yield Target Is 2-3% CPI in 2024

© Reuters.

(Bloomberg) — The Reserve Bank of Australia said a key consideration for whether it extends its yield-target program is the prospect of inflation returning to target in 2024, adding that members thought it would be “premature” to consider ceasing the bank’s bond-buying scheme.

“Members noted a return to full employment as a priority for monetary policy that would assist with achieving the inflation target,” the RBA said in minutes of its June meeting released in Sydney Tuesday. “Consequently, monetary policy would be likely to need to remain highly accommodative for some time yet.”

The central bank is due at next month’s meeting to decide whether to roll over its three-year yield target to the November 2024 bond from the current April 2024 maturity. It’s also set to make a decision on whether to undertake a third tranche of quantitative easing when the current A$100 billion ($77 billion) program ends in September.

On the yield target, members also discussed the likely effect of the decision on “overall financial conditions,” the RBA said.

“The board had previously stated that it would not increase the cash rate until inflation is sustainably within the 2 to 3% target range,” the RBA said. “A key consideration for the decision regarding the yield target would be an assessment of the prospect of this condition being met some time in 2024.”

It said options for government bond purchases included:

  • Ceasing purchasing bonds in September (other than to support the yield target if necessary)
  • Repeating A$100 billion of bond purchases for another six months
  • Scaling back the amount purchased or spreading the purchases over a longer period
  • Moving to an approach where the pace of bond purchases is reviewed more frequently, based on the flow of data and the economic outlook
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“Observing that the bond purchase program had been one of the factors underpinning the accommodative conditions necessary for the economic recovery, members thought it would be premature to consider ceasing the program,” the minutes said.

The board reiterated that it would not increase the cash rate until actual inflation is sustainably within the target range. For this to happen, it restated that wages growth would have to be “materially higher” than it is currently and would require significant gains in employment and a sustained return to a tight labor market.

“The board viewed these conditions as unlikely until 2024 at the earliest,” the RBA repeated.

The Australian dollar traded at 77.05 U.S. cents at 11:36 a.m. in Sydney.

Australia has recovered strongly from Covid-19 as authorities managed to limit outbreaks to isolated flare ups. That’s boosted confidence, which combined with fiscal-monetary stimulus has encouraged households to spend and firms to hire and invest. The economy has now recouped all of the jobs and output lost during the pandemic.

However, wage growth has failed to move much in response and the RBA, in the minutes, noted the potential for participation in the labor market to increase further.

(Updates with Australian dollar in third from final paragraph.)

©2021 Bloomberg L.P.

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