RBA Says Economy Recovering Firmly, Watching Fiscal Tapering By Bloomberg

(Bloomberg) — The Reserve Bank of Australia said the nation’s economy is recovering strongly and it’s watching for the impact of the looming withdrawal of some government programs, according to minutes if its March meeting.

“An important near-term issue was how households and businesses would adjust to the tapering of some fiscal support measures,” the RBA said in the minutes released in Sydney Tuesday. “Members noted that there may be a temporary pause in the pace of improvement in the labor market.”

The government’s signature JobKeeper wage subsidy program is due to expire this month.

The Australia dollar edged lower on release of the minutes, trading at 77.42 U.S. cents at 11:36 a.m. in Sydney. Australian government bonds rallied, outperforming their developed-market peers, ahead of the release.

Australia’s economy has experienced a V-shaped recovery as authorities managed to bring Covid-19 under control and unemployment has fallen accordingly: to 6.4% in January from a pandemic peak of 7.5%. Still, the board said it would take “some time” before the labor market was tight enough to generate wages strong enough to return inflation to 2-3%.

“It was likely that wages growth would need to be sustainably above 3%,” the RBA said. “Wages growth would be unlikely to be consistent with the inflation target earlier than 2024.”

Australia’s central bank has been forced to step up its bond buying in recent weeks, including an unscheduled operation, as it battled rising yields fueled by a reflation trade sweeping global markets. The RBA defended its 0.10% yield target — also the level of the cash rate — and sought to soothe markets.

The bank said today that members discussed the three-year yield target and reiterated it would need to consider “later in the year” whether to shift to the November 2024 bond.

“If the board were to maintain the April 2024 bond as the target bond, rather than move to the next bond, the maturity of the target would gradually decline until the bond finally matured in April 2024,” it said. The bank reiterated that it would give “close attention” to the flow of economic data and the outlook for inflation and jobs when considering the issue.

The board also looked at financial stability issues given asset prices — particularly property — are surging on record-low interest rates.

“Members noted that lending standards remained sound and that it was important they remain so,” the minutes said. “The board concluded there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets

(Updates with market reaction in fourth paragraph)

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