RBA Minutes: Monetary Policy Meeting 4 May

Key points from the minute of the RBA’s monetary policy meeting on 4 May.

Banks

• Bank funding costs and lending rates had remained at historic lows. Drawings on the RBA’s Term Funding Facility had increased as the 30 June deadline for accessing the 3-year funding program approached.
• The RBA noted that there had been a pick-up in issuance of residential mortgage-backed securities by non-banks at favourable spreads, which had been accompanied by an increase in their share of the household lending market. Lending to businesses had also increased a little in preceding months, reflecting a pick-up in lending to large businesses.
• The RBA noted that housing markets had strengthened further, with prices continuing to increase in all major markets. Housing credit growth had also strengthened, with strong demand from owner-occupiers, especially first-home buyers. Given the environment of strong demand for housing, rising housing prices and low interest rates, members agreed on the importance of maintaining lending standards and carefully monitoring trends in borrowing.
• In discussing specific elements of the current monetary policy settings, the RBA agreed that, at the July 2021 meeting, they would consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond. They agreed that a change to the target of 10 basis points was not warranted. Also at the July meeting, the RBA would consider future bond purchases following the completion in September of the second $100 billion of purchases under the government bond purchase program. The RBA remained willing to undertake further bond purchases if doing so would assist with progress towards their goals of full employment and inflation. Future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia.
• The RBA noted that the date for final drawings under the Term Funding Facility is 30 June 2021, that banks had drawn down $100 billion and that a further $100 billion was available. The facility provides funding for 3 years, which means it will continue to support low funding costs in Australia until mid-2024. In an environment where financial markets in Australia are operating well, the RBA did not see a case for a further extension of this facility.

Other

• Strong demand for steel in China and international supply disruptions had also pushed iron ore prices to their highest levels in a decade and boosted Australia’s terms of trade. The increase in commodity and other input prices was expected to contribute to higher inflation globally in subsequent months, and RBA noted that inflation expectations in advanced economies had also increased to be closer to central banks’ targets.
• In turning to the domestic outlook, the RBA noted that the Australian economy was transitioning from recovery to expansion earlier and with more momentum than previously anticipated. The unique features of the pandemic and the policy response had seen the economy rebound much faster than in previous downturns. GDP was expected to have returned to its pre-pandemic level in the March quarter and there were more people employed in March than before the onset of the pandemic. In response to the stronger starting point and improved outlook further out, the forecast for GDP under the baseline scenario had been revised upwards. GDP growth of 4¾ per cent was expected over 2021 and 3½ per cent over 2022.
• Conditions in the housing market had continued to strengthen. Housing prices had increased further in April. In recent months, the upswing in housing prices had become more broadly based across capital cities and regional areas. Turnover had also increased to around its highest level in a number of years, with many properties staying on the market for short periods of time. Strong demand was encouraging an increase in new listings, although the total stock of listings was below the average of recent years because new listings were being sold quickly. Rental markets had tightened in recent months but conditions remained uneven. Rents were increasing at a stronger pace for houses than for units, and in regional areas compared with capital cities. Rental vacancy rates remained high in Melbourne and, to a lesser extent, Sydney, depressing advertised rents there. In other capital cities, vacancy rates were low and advertised rents were increasing at a quicker pace.
• Employment growth was expected to remain firm in the months ahead, given the solid momentum in activity and buoyant forward indicators of labour demand. Some surveyed firms were reporting a lack of available labour as a constraint on output. While job losses from the end of the JobKeeper program were likely, these were expected to be more than offset by demand for labour elsewhere in the economy. Further out, the stronger forecast profile for growth in output and employment was expected gradually to reduce spare capacity in the labour market
• In the baseline scenario, the unemployment rate was expected to continue to decline to around its pre-pandemic level of 5 per cent by the end of 2021 and to 4½ per cent by mid-2023. This lower forecast unemployment rate was expected to put some modest upward pressure on wages growth over time.
• Yields on longer-dated Australian government bonds had moved roughly in line with US Treasuries over the prior month and the spread between 10-year yields in the respective markets had remained close to zero. The RBA’s bond purchase program had continued to run smoothly and in early April the RBA concluded the initial $100 billion of purchases under the program. The second $100 billion of bond purchases was scheduled to be completed in September. Projections suggested the RBA would hold around 30 per cent of outstanding Australian government bonds and 15 per cent of bonds issued by the semi-government authorities by the conclusion of the program in September.

4 May 2021: read full minutes

Monetary PolicyRBA