Australia Central Bank Takes First Steps to Paring Stimulus
Comment of the Day

July 07 2021

Commentary by Eoin Treacy

Australia Central Bank Takes First Steps to Paring Stimulus

This article from Bloomberg may be of interest to subscribers. Here is a section:

“This is a more hawkish statement than we had expected,” said Bill Evans, chief economist at Westpac Banking Corp.

The Australian dollar extended its intraday gain, rising to 75.84 U.S. cents in response to the statement and subsequent comments from Lowe. The April 2024 bond yield crept slightly above the RBA’s target, to 0.13%, while the yield on the November 2024 note surged 8 basis points to 0.45%. Ten-year yields rose 4 basis points to 1.47%.

Lowe is determined to stay near the tail of global peers unwinding stimulus -- particularly the Federal Reserve -- even as Australia has recovered earlier and faster than many economies. That stance is likely aimed at avoiding the currency damage of previous early exits while also reflecting Australia’s vulnerability to further virus outbreaks due to a low vaccination rate.

The governor, in a post-meeting press conference, said that while Australia’s economy had surprised on the upside, this hadn’t passed through to wages and inflation. He said this explained why the RBA wasn’t laying the ground for rate increases like Canada.

“In Canada, the underlying inflation rate is quite close to the Bank of Canada’s target,” Lowe said. “Here in Australia, we’ve been below the target for too many years, and the prospect of reaching the target in the short-term is not particularly high.”

Eoin Treacy's view

Tapering pandemic assistance is high on the list of priorities for countries less affected by the pandemic. That’s particularly true as inflationary pressures creep upwards with so much money sloshing around the system. At the same time no one wants a strong currency so there is a lot of reticence to be too aggressive in normalising policy.  

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