Reserve Bank of Australia retains interest rate at 0.1pc and reveals economic outlook for 2021

The central bank has revealed its latest stance on interest rates and set out its economic predictions for the coming year.

The Reserve Bank of Australia has retained the official interest rate at current levels, flagging further assistance will be needed for the country’s economic recovery out of the coronavirus pandemic.

In its monthly monetary policy statement released on the first Tuesday of every month, the RBA said it would keep the cash rate at 0.1 per cent while global economic output is hindered by COVID-19.

The update is the first outlook statement by the central bank for 2021, with economists predicting current stimulus measures would remain at current settings.

It has also decided to purchase an additional $100bn worth of government bonds as the additional monetary support is set to expire in April. The additional buying will be in the form of $5bn per week.

The central bank implemented a bond buying regime as part of its quantitative easing measures to support the economy through the pandemic.

Buying government bonds flushes the money market with more liquidity and assists in alleviating pressures in a low interest rate environment.

The Reserve Bank of Australia has retained the official interest rate at current levels. Picture: NCA NewsWire/Joel Carrett

RBA Governor Philip Lowe said a return to normal economic measures are “still some way off”, with the central bank to continue its support for the foreseeable future.

“The current monetary policy settings are continuing to help the economy by lowering financing costs for borrowers, contributing to a lower exchange rate than otherwise, supporting the supply of credit needed for the recovery and supporting household and business balance sheets,” Dr Lowe said.

“The decision to extend the bond purchase program will ensure a continuation of this monetary support.”

Dr Lowe also pointed to the tapering of major fiscal stimulus measures such as JobKeeper ending, which will identify whether Australians will have confidence to spend without government support.

“An important near-term issue is how households and businesses adjust to the tapering of some of the COVID-19 support measures and to what extent they will use their stronger balance sheets to support spending,” he said.

The central bank expects GDP in 2021 will grow 3.5 per cent and return to 2019 levels by the middle of the current year.

RBA Governor Philip Lowe said a return to normal economic measures are “still some way off”. Picture: Nikki Short

Inflation and wages are expected to pick up, however will remain below 2 per cent for the next two years.

The RBA board has flagged and increase in the cash rate will not occur until actual inflation is within its target range of 2 to 3 per cent.

“For this to occur, wages growth will have to be materially higher than it is currently,” Dr Lowe said.

“This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.”

Dr Lowe noted employment has rebounded strongly, but forecast show the unemployment rate will remain about 5.5 per cent until at least the end of 2022.

“The outlook for the global economy has improved over recent months due to the development of vaccines,” RBA Governor Philip Lowe said.

Inflation and wages are expected to pick up, however will remain below 2 per cent for the next two years. Picture: NCA NewsWire/Joel Carrett

“While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago.”

“That recovery, however, remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.”

During the pandemic, the RBA also implemented a Term Funding Facility (TFF) which provides banks a cheap source of funding to ensure lending rates passed on households and businesses can remain low.

According to the RBA, banks have withdrawn $86bn through the TFF and have access to a further $99bn.

The RBA’s balance sheet since the start of 2020 has increased by approximately $160bn due to the additional measures implemented because of COVID-19.

Originally published as Reserve Bank of Australia retains interest rate at 0.1pc and reveals economic outlook for 2021