RBA ends dramatic year by keeping official cash rate on hold at 0.1%

The RBA kept what remains of its powder dry at the final meeting of a year that witnessed the most dramatic loosening of monetary policy on record.

The RBA kept the official cash rate on hold at 0.1 per cent at its final meeting of 2020.

The Reserve Bank Board has kept what remains of its power dry at the final meeting of a year that witnessed the most dramatic loosening of monetary policy on record.

After the final board meeting of the year governor Philip Lowe declared reducing unemployment an “important national priority” and signalled the RBA could consider increasing its signature $100bn bond buying program if the economy didn’t bounce back as expected.

“The economic recovery is under way and recent data have generally been better than expected,” Dr Lowe said in a statement that stressed the Reserve Bank had no intention to lift interest rates until unemployment was much lower than its current level of 7 per cent.

The Australian dollar traded slightly higher at just under US73.70 cents on what was perceived as a more optimistic tone.

“This [recent data] is good news, but the recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support,” said Dr Lowe, suggesting the economy would not be back to its 2019 size until the end of 2021.

In November the RBA cut the cash rate to a new record low of 0.1 per cent, unveiled a $100bn quantitative easing program, and reduced the interest rates commercial banks would pay to borrow from the RBA to 0.1 per cent.

Marcel Thieliant, an economist at Capital Economics, said the RBA “sounded cautious but if our more optimistic forecasts for GDP growth and inflation are realised, the Bank may not decide to expand QE when it is set to expire in April”.

“The Bank described recent overseas news as “mixed” as positive developments on the vaccine front were offset by a renewed sharp rise in infections in Europe and the United States,” he added.

Dr Lowe said the RBA would not lift the cash rate until consumer price inflation, which was 0.7 per cent over the year to September, was back above 2 per cent and wage growth had risen significantly.

“Given the outlook, the board is not expecting to increase the cash rate for at least three years. The board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The board is prepared to do more if necessary,” Dr Lowe said.

The meeting, ahead of the board’s two-month summer break, came a day before the release of the national accounts for the third quarter of the year, widely expected to show the economy grew over the three months to the end of the September, formally bringing to an end the recession (often defined as two consecutive quarters of economic contraction).

Dr Lowe said over the past month the RBA had bought $24bn in federal and state government bonds. “Since the start of this year, the RBA’s balance sheet has increased by around $130bn,” said Dr Lowe.

New government figures released earlier this week showed the number of jobs supported by JobKeeper had fallen from 3.6 million to 1.5 million between September and October. The federal budget brought down in October had assumed 2.2 million workers would be supported by the payment in the December quarter.

“The RBA finishes the year with a ‘steady as she goes’ statement, with no changes to the policy settings put in place in November and the key final paragraph repeated word-for-word,” said ANZ economist David Plank.