• The Reserve Bank of Australia has left interest rates on hold at 0.10% during its monthly meeting.
• The central bank did however reveal that it was making a major adjustment to its stimulus package, committing to purchasing “at least” $4 billion in bonds a week after September.
• It gives the RBA flexibility to adapt its QE program, changing its mandate from a set $5 billion every week.
• Visit Business Insider Australia’s homepage for more stories.

The Reserve Bank of Australia (RBA) is softening its line on interest rates as it becomes increasingly concerned with Australia’s property market.

On Tuesday, the central bank exited its monthly meeting with the official cash rate left unchanged at 0.10%. While expected, the RBA also unveiled the latest changes to its quantitative easing (QE) program, the subject of much speculation.

The RBA Board revealed it would introduce greater flexibility into its bond buying program, which has flooded the Australian economy with cash since March 2020, as it looks to hone a more adaptive monetary policy.

“At its meeting today, the Board decided to continue purchasing government bonds after the completion of the current bond purchase program in early September,” Governor Philip Lowe said. “These purchases will be at the rate of $4 billion a week until at least mid November.”

The change sees the RBA to continue pumping money into the economy by at least two months, but will dilute its previous mandate of doing so by $5 billion each and every week, allowing the central bank to taper future support.

It comes as the economic recovery continues to roar on, despite lockdowns, and the need for ongoing stimulus becomes somewhat diminished.

“The Bank will continue to purchase bonds given that we remain some distance from the inflation and employment objectives. However, the Board is responding to the stronger-than-expected economic recovery and the improved outlook by adjusting the weekly amount purchased,” Lowe said. “It will conduct a further review in November, allowing the Board to respond to the state of the economy at that time.”

The policy settings have so far helped to return unemployment to 5.1% on a wave of hiring that hasn’t been seen in years, according to Indeed Asia-Pacific economist Callam Pickering.

“Quite simply, there has never been this many jobs available. With unemployment and underemployment falling considerably, it isn’t unreasonable to suggest that this is the tightest Australian labour market since the global financial crisis began,” Pickering said.

“High vacancies point towards strong employment growth and further labour market tightening. Skill-shortages are expected to emerge or become broader, with wage competition triggering stronger wage growth across the country.”

“Short-term lockdowns remain an ever present threat to Australia’s economic recovery but so far haven’t had major impact.”

Low interest rates coupled with a flood of stimulus has also helped to inflate Australia’s property market, with prices soaring since October to the chagrin of regulators.

More than twelve months on from the pandemic being declared, and after a period of unprecedented stimulus, the RBA Board accordingly finds itself at a juncture. It must begin planning when and how it will eventually tighten up easy monetary policy while also reassuring the country it won’t do so prematurely.

However, it is also increasingly conscious of the fact that it will have to withdraw support sooner than previous promised. The RBA again changed the wording around interest rate moves on Tuesday, saying that “the Bank’s central scenario for the economy” is that the conditions that would force a rate hike, being full employment, wage growth and inflation, “will not be met before 2024”.

This was wound back from calling the premature achievement “unlikely” or “not expected”, demonstrating the bank is coming around to the fact that it may hike before 2024, if it continues to be surprised to the upside.

Of course, when it actually pulls the trigger is another matter altogether, with Pickering noting that forecasts won’t be enough to push the RBA to move.

“A key uncertainty for policy is the imprecise relationship between labour market tightness and wage growth,” he said. “We don’t know whether a 5% or a 4.5% or a 4% unemployment rate will be sufficient to drive wage growth towards 3% or higher. And without knowing that relationship, it is folly to predict the path of policy with any certainty.”

“The conditions necessary to tighten policy will be abundantly clear when they are achieved. Namely, wage growth of over 3% and inflation that falls within the 2-3% target band for six-months or longer.”

Lowe spoke in Sydney following the monthly meeting to elaborate on how the RBA sees Australia’s recovery progressing and how it intends to use monetary policy.

He confirmed that the RBA is “not locked into any particular path”, establishing the central bank will continue to change tact as it sees necessary.

Lowe explained that a rate hike would require inflation and wages to rise substantially and be maintained for a period of time for the Board to be assured that this wouldn’t be endangered by higher interest rates.

He did however emphasise that the RBA cannot see wages growing properly until 2024 unless something significant was to change within the labour market.

Lowe said the opening of borders would be a major factor in how the recovery progresses, and that it would be “good news for the economy” when it does happen.

“It’s also important for businesses. We hear reports that one of the reasons they are not investing is because they can’t get the workers [from overseas that they need].”

With regard to house prices, Lowe flagged that the central bank would work with APRA to intervene in lending if credit growth continued to outstrip wages.

“It’s not in the country long term interest to have debt increasing at a much higher rate than their incomes,” he said.

More to come.

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