The RBA has upgraded its projections for Australia’s economic recovery as unemployment continues to fall sharply ahead of next week’s budget.
The RBA left rates on hold at their effective lower bound of 0.1 per cent but revised its outlook for Australian GDP growth to 4.75 per cent over 2021 and 3.5 per cent through 2022, with a pick-up in business investment and household spending expected to support much of the recovery.
“The economic recovery in Australia has been stronger than expected and is forecast to continue,” said RBA governor Philip Lowe.
“This recovery is especially evident in the strong growth in employment, with the unemployment rate falling further to 5.6 per cent in March and the number of people with a job now exceeding the pre-pandemic level.”
The decision comes ahead of next week’s budget announcement, which will see Treasurer Josh Frydenberg turn his back on measures to rebuild the government’s fiscal position in favour of driving unemployment even lower. Mr Frydenberg expects nominal economic growth to exceed interest rates for at least the next decade, keeping the cost of servicing the government’s debt low.
“With Treasurer Josh Frydenberg signalling that the government will not be taking ‘any sharp pivots towards austerity’ in its upcoming Budget on May 11 and that the jobless rate will ‘need to have a four in front of it’ to generate faster wage growth, both monetary and fiscal policy is aligned in trying to drive unemployment down to levels not seen since before the global financial crisis,” said Fidelity’s Anthony Doyle.
“Given today’s guidance, speculation around future RBA policy will now be firmly focused on the July meeting.”
Governor Lowe indicated that the RBA would use its July meeting to consider whether to retain the April 2024 bond as the three-year yield target or shift to the next maturity – the November 2024 bond. However, the board will not consider a change to the target of 10 basis points.
“The RBA has kicked the key decisions regarding its monetary policy stance down the road to July, but given the domestic and global backdrop continues to evolve rapidly, it will likely err on the side of caution and favour easy policy settings in 2021, before potentially reviewing its policy settings again in 2022,” Mr Doyle said.
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