RBA Kent: Prospects For Growth And Rise In Inflation “Good”
- Published on
- 09 Jun 2021, 09:32 AM
By Sophia Rodrigues
(Sydney, June 9, 2021)—The prospects for growth and an eventual increase in wages and inflation are “good” as households and businesses benefit from record low interest rates, and supportive fiscal policy, a senior Reserve Bank of Australia official said Wednesday.
RBA’s Assistant Governor Christopher Kent made the comments in a speech delivered at the KangaNews webinar on the topic, “The Term Funding Facility, other policy measures, and financial conditions.”
Still, the process will be a gradual one, with inflation unlikely to be sustainably within the target range of 2% to 3% until 2024 at the earliest, Kent said, reiterating the RBA’s forward guidance from recent monetary policy statements.
In the speech, Kent appeared unperturbed by the increase in bond yields over recent months because its impact on broader financial conditions is minimal.
As far as monetary policy is concerned, it is the financial conditions that the RBA tracks more closely than any change in yield levels.
“The adjustments in financial markets to date are not a cause for concern,” Kent said.
Measures of inflation expectations have returned to levels of a few years ago when it was consistent with, or even below, inflation targets, so they don’t point to inflation sitting above central bank target in a sustainable way over the coming years, Kent said.
“The increase in nominal yields has been smaller than the increase in expected inflation, which implies that real yields have declined. This is beneficial because it means that monetary policy is more stimulatory than otherwise,” Kent said.
He noted that the rise in bond yields beyond the 3-year point and swap rates have resulted in corporate bond yields increasing a little.
The rise in the swap rate around the 3-year mark has flowed through to higher yields on bond bonds in the secondary market but because bond issuance is low, the effects on banks’ outstanding funding costs is low.
In case of mortgage rates, the increase in fixed-rate loans of terms between three and four years has been modest, Kent said, adding that fixed-rate loans at these longer terms account for a small share of overall lending.
“Meanwhile, the rates on shorter-term fixed-rate mortgages are little changed. Also, many older fixed-rate loans that are rolling off in the period ahead will be moving to lower rates than they had been paying,” he added.
Overall, Kent noted, there’s been a bit of an increase in some new fixed rates.
“But the effect of this on broader financial conditions is minimal, and shorter-term rates, including for variable-rate loans which constitute the bulk of credit, will remain low for as long as it takes to achieve the Bank’s inflation goals.”
Kent devoted a lot of time talking about the RBA’s Term Funding Facility where the final drawdown is set to close at the end of this month.
The TFF has been an important part of the RBA’s package of policy measures which includes the near-zero cash rate target, bond purchase program and three-year yield target, and has brought about “very accommodative financial conditions in Australia, and will continue to provide support in the years ahead, Kent said.
Kent said the most direct effect of the TFF has been to provide banks with a low-cost source of funding. Together with the large increase in low-cost deposits, the TFF has led to reduction in banks’ cost of funds to historic lows.
The TFF also led to decline in bond issuance by banks which benefitted other institutions issuing debt.
“With fewer bank bonds on offer, investors have switched into other securities, including asset-backed securities and non-bank corporate bonds. This has contributed to a noticeable decline in spreads on these securities,” Kent said.
Overall, the effect of TFF and other policy measures have caused interest rates across the economy to be lower than they would otherwise be, Kent added.