Australia markets close in 2 hours 46 minutes

    -98.20 (-1.22%)
  • ASX 200

    -99.10 (-1.28%)

    -0.0003 (-0.04%)
  • OIL

    +0.25 (+0.31%)
  • GOLD

    +2.00 (+0.08%)
  • Bitcoin AUD

    +622.02 (+0.61%)
  • CMC Crypto 200

    -45.70 (-3.05%)

    +0.0009 (+0.16%)

    +0.0015 (+0.14%)
  • NZX 50

    +9.66 (+0.08%)

    +61.14 (+0.33%)
  • FTSE

    -63.41 (-0.76%)
  • Dow Jones

    -216.74 (-0.55%)
  • DAX

    -96.83 (-0.52%)
  • Hang Seng

    -294.75 (-1.57%)
  • NIKKEI 225

    -65.85 (-0.17%)

RBA delivers ongoing stimulus as the risk of overheating builds

Reserve Bank of Australia has extended the era of cheap and easy money. Source: Yahoo Finance/Getty
Reserve Bank of Australia has extended the era of cheap and easy money. Source: Yahoo Finance/Getty

The Reserve Bank of Australia has extended the era of cheap and easy money with its decision to keep buying bonds and leaving official interest rates and the target for April 2024 bonds at 0.1 per cent.

Remember these were the extreme, unprecedented and emergency monetary policy measures put in place at the depths of the COVID-19 recession. That was when the economy registered its weakest result since the 1930s Great Depression with inflation falling to a record low and wages being crunched as GDP fell by more than 7 per cent.

It begs the question – is the economy still performing so badly that these policies are still needed?


More from The Kouk:

There is no doubt the economy has recovered more robustly than anyone was expecting during 2020 and there is little to suggest there will be any loss of momentum in this good news story. Not even the NSW lock down is likely to have a material or lasting impact on the path to full employment, rising wages growth and a lift in inflation.

Despite its actions of keeping extreme monetary policy stimulus in place, even the RBA acknowledges ‘the economic recovery in Australia is stronger than earlier expected and is forecast to continue’.

What’s more, it says ‘the labour market has continued to recover faster than expected … Job vacancies are high and more firms are reporting shortages of labour’.

So why the need for such dramatic economic support by maintaining a policy stance that is set for one in 100 year recessionary conditions, even though those conditions ended almost a year ago?

What is the RBA looking at?

To be fair for a moment, the RBA has as its targets an inflation rate between 2 and 3 per cent and full employment, which is judged to be achieved with an unemployment rate around 4.5 per cent and annual wages growth above 3.5 per cent.

And of course, the data on inflation, unemployment and wages are still well away from these goals.

That said, the hard data on inflation and wages is only available for the March quarter 2021, which is ancient history when judging turning points in these key economic variables.

And while no one was calling for the RBA to tighten monetary policy now, there is growing evidence that skills shortages are sparking wages pressures, that those wage pressures are flowing into selling prices and hence inflation and that by the end of 2021, there could be compelling signs of economic overheating in Australia.

In recent months, many central banks around the world have at least canvassed the notion that a monetary policy tightening could be in the offing in the near term if the clear signs of inflation are built upon as the expansion continues.

Indeed, the news from the US, the UK, Canada and New Zealand, to name a few, have their central banks openly considering the realistic possibility that emergency monetary policy will need to come to an end and indeed, reversed if inflation is to be contained.

Our RBA seems to have been unable to grasp this possibility, despite the unambiguously good news at home and abroad.

Perhaps it will change its view in the months ahead, after the June and September quarter inflation and wages data which should show a clear trend higher.

If the news is good, the RBA’s bond buying and target for the April 2024 bond will no longer be necessary.

Even with that good news, however, the RBA might be wise to wait another quarter or two for confirmation of the rising wage / inflation pressures before acting but to hike interest rates.

But by this time next year, with the unemployment rate around 4.5 per cent, underlying inflation lifting to the upper part of the target band and wages growth bursting through 3 per cent, a hike in interest rates would seem prudent, not that the RBA acknowledges this to be anything other than a remote possibility.

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free Fully Briefed daily newsletter.