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Reserve Bank to take first steps back towards normal policy settings

The Reserve Bank will take its first step towards normal interest rate settings on Tuesday by winding back key elements of its quantitative easing program as the economy recovers from the coronavirus recession faster than expected.

While official interest rates will not be lifted following the bank board’s meeting, the RBA is expected to reduce its purchases of government debt while winding up its yield curve control program in a tacit admission it may start normalising monetary policy before 2024.

RBA governor Philip Lowe will hold his third press conference since taking the post in 2016 to explain changes to the bank’s policies.

RBA governor Philip Lowe will hold his third press conference since taking the post in 2016 to explain changes to the bank’s policies.Credit:Dominic Lorrimer

Since the start of the pandemic, the bank has taken official interest rates down to a record low 0.1 per cent, bought hundreds of billions of dollars worth of government bonds, sought to control the yield on three-year government debt and offered cheap loans to banks.

Bank governor Phil Lowe has said repeatedly interest rates won’t be lifted until 2024 “at the earliest” as the RBA seeks to drive down the unemployment rate, increase wages growth and get inflation to its 2-3 per cent target rate.

Despite various state and capital city lockdowns, unemployment is back to 5.1 per cent, there are more people in work than before the pandemic, house prices are growing at their fastest rate since the late 1980s while there are some early signs of inflationary pressures.

Financial markets and some economists believe the bank will start increasing official interest rates as early as November next year due to the strength of the economy.

IFM chief economist Alex Joiner said it was clear that the Reserve Bank would have to start winding back some of its economic support.

“We no longer need emergency policy settings, but we need stimulatory settings,” he said.

Its first measure, to be confirmed on Tuesday, is expected to be an end to its targeting of the yield on 3-year government bonds. The bank has targeted a yield of 0.1 per cent, effectively keeping a lid on the interest paid by the government on this debt while anchoring interest rate expectations in the broader debt market.

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