Domestic economic developments

Turning to the domestic economy, members noted that the in the second half of 2020 had been faster than initially expected, in line with the pattern observed internationally. Favourable outcomes in Australia had enabled the lifting of restrictions and boosted . had rebounded quickly as health-related restrictions on activity had been eased, suggesting that -side constraints were key to driving the spending patterns observed during the pandemic; households had also adapted their consumption habits. Business had fallen, but by less than expected. More broadly, the rapid bounce-back in activity had also been supported by additional [budgetary] measures announced by the Australian and state governments in the latter part of 2020. This had enabled a faster recovery in market conditions than expected a few months earlier, with the rate in the December quarter declining more quickly than even the upside scenario presented in the November 2020 Statement on Monetary Policy.

In discussing the outlook for activity and the labour market, members noted that the forecasts under the baseline scenario had been upgraded relative to 3 months earlier. This upward revision incorporated the stronger starting point for the forecasts and improved outlook. GDP and employment were now expected to reach their pre-pandemic levels over the course of 2021, around 6–12 months earlier than previously expected.

Members noted that the lowest rate of growth since the First World War would continue to have a significant bearing on the outlook. The level of was not expected to return to its previous trajectory over the forecast period, largely because population growth would be so much lower than assumed prior to the pandemic. Lower population growth would continue to weigh on both demand and labour in the period ahead, although the effects on labour supply and would be partly limited by students tending to have a lower rate than the domestic working-age population. Low population growth, reflecting reduced net overseas in particular, was also expected to affect high-density residential for some time to come. Members noted that overall dwelling investment would have been lower had the HomeBuilder program and other state government incentives been less effective in stimulating activity in the detached housing sector.

In their discussion of the labour , members observed that, in contrast to expectations 3 months earlier, the peak in the rate had probably already occurred. Notwithstanding a swift rebound in the participation rate, the firmer outlook for had resulted in a lower expected unemployment rate profile across the forecast period. Despite the end of the JobKeeper program [i.e. subsidy] in March creating some uncertainty for near-term labour market outcomes, the unemployment rate was expected to resume trending lower in the second half of the year. In the baseline scenario, the unemployment rate was expected to decline to around 6 per cent by the end of 2021, before reaching around 5¼ per cent by mid 2023. While the strong recovery and improved outlook for employment had reduced the prospects for substantial scarring effects in the labour market, the forecasts implied that there would still be in the labour market at the end of the forecast period.

Members commenced their discussion of the household sector by noting that the rebound in consumption in the second half of 2020 had been supported by very strong growth in income over the year. As temporary income support measures tapered or ceased, household income was expected to decline through to the middle of 2021, before resuming steady growth in line with recovery in the labour market. In the baseline scenario, consumption growth was expected to remain positive but moderate in the period ahead; in per terms, the level of consumption had rebounded strongly and, by 2022, was forecast to have returned to levels expected prior to the pandemic. The outlook for consumption was supported by many households strengthening their balance sheet [e.g. paying off ] and liquidity positions [e.g. increasing ] during the pandemic. Restrictions on , precautionary behaviour and strong growth in had contributed to households adding considerably to savings during the June and September quarters of 2020. Members noted the significant uncertainty around whether and how quickly the savings would return to more typical levels, and how households would use the additional savings accumulated during 2020.

Members observed that conditions in the housing had been more resilient than expected, which had assisted the economic recovery. Housing prices had recently been rising across most of Australia following an earlier period where conditions had been quite variable. This had returned the national housing price index to levels reached around 4 years earlier. Housing price increases had been larger in Australia than in the cities; price levels in some smaller capital cities had increased to new highs. Members noted that there were few signs of a deterioration in lending standards; however, lending standards would be monitored closely in the period ahead.

In their discussion of the outlook for wages growth and inflation, members noted that the forecasts under the baseline scenario had increased a little relative to 3 months earlier, in line with the lower expected rate. However, both wages growth and inflation were expected to remain below 2 per cent over the forecast period, reflecting ongoing in the economy.

Members observed that wages growth had been subdued for a number of years and had recently declined further, to the lowest levels in at least 2 decades. Firms had responded quickly in the early stages of the pandemic by delaying wage increases, imposing wage freezes and, in some cases, applying temporary wage cuts. Liaison contacts had suggested it could be some time before wage freezes were lifted. The improved outlook for activity and was expected to lift private wages growth a little over the forecast period. However, this was partly offset by the downward revision to the outlook for sector wages growth, as some state governments had announced measures to cap wages growth at rates below those seen in recent years.

Turning to the outlook for inflation, members noted that underlying inflation pressures were subdued and expected to remain so in the period ahead. Although the outlook for underlying inflation had been revised up a little relative to 3 months earlier, ongoing spare capacity and low were expected to keep underlying inflation below 2 per cent over the forecast period. Members recalled the domestic and international experience prior to the pandemic, which suggested that a sustained period of labour market would be needed to generate the faster wages growth required to see inflation return to the to per cent target range. year-ended inflation was expected to increase temporarily to around 3 per cent in the June quarter 2021, largely reflecting swings in the prices of child , automotive and some other administered prices. It was then forecast to fall back below 2 per cent by the end of the year and stay below 2 per cent over the remainder of the forecast period.

Considerations for monetary policy

...The Bank's policy actions to date had been working broadly as expected. Together, the bond purchases, the TFF and the targets for the 3-year bond yield and the cash rate were helping the economy by lowering financing for borrowers, contributing to a lower rate than otherwise, supporting the supply of credit and supporting housing and business balance sheets. Since the start of 2020, the Bank's balance sheet had increased by around $160 billion and a further substantial increase was in prospect. The Bank had bought a cumulative $52 billion of government issued by the Australian Government and the states and territories under the bond purchase program. The Bank had not purchased bonds in support of the 3-year yield target since early December 2020. Authorised deposit-taking institutions had drawn down $86 billion of low-cost funding through the TFF and had access to a further $99 billion under the facility. Members noted that the Australian banking system, with its strong capital and liquidity buffers, had remained resilient and was helping to support the recovery.

The Board remained committed to doing what it reasonably could to support the Australian economy, and decided to maintain the existing policy settings. Members concluded that very significant monetary support would be required for some time, as it would be some years before the Bank's goals for and were achieved. Given this, it would be premature to consider withdrawing monetary .

Members discussed the bond purchase program, which was scheduled to be completed in mid April 2021. They considered 3 factors: the effectiveness of the bond purchases; the decisions of other central banks; and, most importantly, the outlook for inflation and employment. The Board assessed that the bond purchase program had helped to lower rates and had contributed to a lower rate than otherwise. Australia's government bond markets continued to function well and further purchases were not expected to be a source of market dysfunction.

A number of central banks in other advanced economies had announced extensions of their bond purchase programs to at least the end of 2021, and there was a widespread expectation among market participants that the Bank's program would be extended in some way. Given this, if the Bank were to cease bond purchases in April, it was likely that there would be unwelcome significant upward pressure on the rate. Members discussed the outlook for the economy and concluded that it would be some years before the goals for and unemployment were achieved. In view of these considerations, and the fact that the cash rate was at its effective lower bound, the Board resolved to purchase an additional $100 billion of bonds issued by the Australian Government and states and territories following the completion of the existing bond purchase program in mid April. These additional purchases would be at the same rate of $5 billion per week, allocated on the same basis, namely around 80 per cent Australian Government Securities and around 20 per cent bonds issued by the states and territories. The decision to extend the bond purchase program would ensure a continuation of the Bank's support for the Australian economy.

Members reviewed the operation of the TFF and agreed that it had worked as intended by reducing costs and supporting the flow of , including for small and medium-sized enterprises. The Board decided to maintain the existing terms of the facility. Banks will be able to draw on the facility until the end of June 2021, and continue to benefit from this low-cost funding through to mid 2024. The Board would consider extending the facility if there were a marked deterioration in funding and credit conditions in the Australian system. However, there had not been signs of such a deterioration recently.

Members also discussed the operation of the target for the 3-year Australian Government yield. This target had been effective in lowering short-term rates, which matter most for private borrowing and lending decisions. The target had also helped to anchor the Australian yield curve, and reinforced the Bank's forward guidance regarding the cash rate. The Board determined that the 3-year yield would be maintained. Later in the year, the Board would need to consider whether to shift the focus of the yield target from the April 2024 bond to the November 2024 bond. In considering this issue, members would give close attention to the flow of economic data and the outlook for and employment.

Members also discussed the effect that low interest rates have on financial and macroeconomic stability. They acknowledged the risks inherent in investors searching for yield in a low interest rate environment, including risks linked to higher [i.e. increased indebtedness] and asset prices, particularly in the market. The Board concluded that there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets.

Members affirmed that the cash rate would be maintained at 10 basis points for as long as necessary. They continued to view a negative policy rate as extraordinarily unlikely. The Board will not increase the cash rate until actual is sustainably within the 2 to 3 per cent target range. For this to occur, will have to be materially higher than it is currently. This will require significant gains in and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.

The decision
The Board reaffirmed the existing policy settings, namely:

a target for the cash rate of 0.1 per cent
an interest rate of zero on Exchange Settlement balances held by financial institutions at the Bank
a target of around 0.1 per cent for the yield on the 3-year Australian Government bond
the expanded Term Funding Facility to support credit to businesses, particularly small and medium-sized businesses, with an interest rate on new drawings of 0.1 per cent
the purchase of $100 billion of government bonds of maturities of around 5 to 10 years at a rate of $5 billion per week following the Board meeting on 3 November 2020.
The Board agreed to purchase an additional $100 billion of government bonds when the existing bond purchase program is completed in mid April 2021. These additional purchases will be at the same rate of $5 billion per week.