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RBA cash rate on hold, forecasts upgraded

·2-min read

The Reserve Bank of Australia has left the cash rate at a record low 0.1 per cent following its monthly board meeting, but has upgraded its economic forecasts.

RBA governor Philip Lowe reiterated the board will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range.

"For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently," Dr Lowe said in a statement on Tuesday.

"This is unlikely to be until 2024 at the earliest."

Even so, Dr Lowe said the economic recovery has been stronger than expected and that is forecast to continue.

The central bank now expects growth of 4.75 per cent over 2021, rather than 3.5 per cent as earlier predicted.

The unemployment rate now at 5.6 per cent is expected to be around five per cent at the end of this year instead of six per cent, and 4.5 per cent at the end of 2022.

"Despite the strong recovery in economic activity, the recent CPI data confirmed that inflation pressures remain subdued in most parts of the Australian economy," Dr Lowe said.

"A pick-up in inflation and wages growth is expected, but it is likely to be only gradual and modest."

Annual inflation was 1.1 per cent at the end of March.

"In the short term, CPI inflation is expected to rise temporarily to be above three per cent in the June quarter because of the reversal of some COVID-19-related price reductions," Dr Lowe said.

"Inflation in underlying terms is expected to be 1.5 per cent in 2021 and two per cent in mid 2023."

The RBA's full set of economic forecasts will be released in its quarterly statement on monetary policy on Friday.

Dr Lowe said given financial markets are operating well, the board does not intend to extend its term funding facility for banks beyond June 30.

"Given the facility provides funding for three years, it will continue to support low funding costs in Australia until mid 2024," he said.