CANBERRA, AAP – There seems little doubt the Reserve Bank will keep interest rates at record lows when its board meets on Tuesday, despite signs of a strengthening recovery from last year’s recession.
Central bank governor Philip Lowe has repeatedly said the board won’t take interest rates into negative territory.
He has also pledged the cash rate won’t increase from a record low 0.1 per cent until inflation is sustainably within the two to three per cent target, and probably not until 2024.
However, financial markets appear sceptical of such an outlook, with interest rates, or yields, on government bonds factoring in 0.5 per cent of rate hikes by the end of 2023.
Global bond yields have risen sharply in recent weeks on the view that the world economy will recover from the COVID-19 induced recession quicker than first thought, fuelling inflation.
Such market action runs at odds with what the RBA and other central banks are trying to achieve through massive bond buying programs, otherwise know as quantatitive easing, aimed at keeping market interest rates, and in turn borrowing costs, low.
At its February board meeting, while keeping the rate at 0.1 per cent on its suite of policy measures, the RBA also unexpectedly announced it will purchase an additional $100 billion in government and state bonds when an existing program ends in mid-April.
“My expectation is that the RBA will merely affirm current policies, though another attempted ‘big bang’ announcement of a larger and longer QE program can’t be ruled out,” BetaShares Capital chief economist David Bassanese said.
“Of course, the risk for the RBA – and global central banks in general – is that they find they can’t control yields as easily as they might have expected in the face of a market that determinedly disagrees with their benign inflation outlook or the likely actual path of central bank policy.”
Meanwhile, the final quarterly pieces for the December quarter national accounts jigsaw are also released on Tuesday – international trade and government spending.
The national accounts, which contain the latest economic growth figures, are released on Wednesday.
At this stage, economists are predicting the economy expanded by around 2.5 per cent in the final three months of 2020, building on the sharp 3.3 per cent recovery from recession in the September quarter.
Monthly building approvals figures for January are also due to be released.