The Reserve Bank gets the Delta blues
Reserve Bank Board meeting

• What happened? The Reserve Bank (RBA) left the target rates for both the cash rate and 3-year government bond yield (April 2024 maturity) at 0.1 per cent. The RBA will pare back (taper) bond purchases to $4 billion a week, but extend purchases until at least mid-February 2022 to reflect “the delay in economic recovery.”

• Implications: Accommodative policy settings remain supportive of the uptrend in equities.

What has changed since the last Board meeting on August 3?

• NSW, Victoria and the ACT remain in virus lockdowns.

• The Australian economy grew by 0.7 per cent in the June quarter to be up a record 9.6 per cent on a year ago. CBA Group economists expect the economy to contract 4.4 per cent in the September quarter.

• Employment rose by 2,200 in July. The jobless rate fell from 4.9 per cent to a 12½-year low of 4.6 per cent.

• Job ads, as measured by ANZ, fell by 2.5 per cent in August.

• Retail spending fell by 2.7 per cent in July to stand 3.1 per cent lower than a year ago.

• The NAB business confidence index fell by 18.5 points to a 12-month low of -7.9 points in July. And the conditions index dropped 13.5 points to a 9-month low of +11.4 points.

• The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 4.4 per cent in August to an 11-month low 104.1.

• The CoreLogic Home Value Index of national home prices rose by 1.5 per cent in August to be 18.4 per cent higher over the year – the strongest annual growth rate in 32 years.

• Council approvals to build new homes fell by 8.6 per cent in July – the fourth successive monthly decline.

• Private sector credit rose 0.7 per cent in July to be up 4.0 per cent on the year – strongest annual gain in 2 years.

• The value of new loan commitments for housing rose by 0.2 per cent in July to $32.1 billion.

• In August, the US Dow Jones index rose by 1.2 per cent; the S&P 500 added 2.9 per cent and the Nasdaq gained 4.0 per cent. In Australia the ASX 200 rose by 1.9 per cent – the 11th straight monthly gain.

• The Aussie dollar has broadly held between US71-75 cents, and is near US74.50 cents currently.

The assessment

• “The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.”

Perspectives on interest rates

• The RBA left the cash rate at 0.1 per cent for the ninth meeting after cutting the rate from 0.25 per cent on November 3, 2020. The RBA previously cut the cash rate on March 3 and March 19, 2020, each by 25 basis points. The target rate for 3-year bond yields was left at 0.1 per cent. On November 3, the RBA cut the 3-year bond target from 0.25 per cent to 0.1 per cent. The RBA implemented the 0.25 per cent target rate for 3-year bond yields on March 19, 2020.

Implications

• The Reserve Bank (RBA) Board will continue to do everything in its power to support the Australian economy over the recovery and expansion phases. While the RBA believes that the best short-term support will come from governments (fiscal policy), today it extended the timeframe for bond purchases in order to keep borrowing costs ultra-low for Aussie households and businesses, ensuring that there is an abundance of liquidity in the economy as government bond issuance eases. The stimulative conditions will provide support for the sharemarket. Growth-focussed and high-yielding stocks will be favoured over banks and safe-haven sectors.

• The RBA said the economy had considerable momentum prior to the Delta outbreak. The economic recovery has now been interrupted – but only temporarily. “The Delta outbreak is expected to delay, but not derail, the recovery. “ The RBA is effectively saying that it apologises for the break in transmission and hopes that normal services will soon be restored.

Published by Craig James, Chief Economist, CommSec