Statement on Monetary Policy - MAY 2021 - Reserve Bank of Australia
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Statement on
Monetary
Policy
M AY 2 0 2 1
Statement on Monetary Policy
MAY 2021
Contents
Overview 1
1. The International Environment 5
Box A: Emerging Market Vulnerabilities and Financial
Conditions in Advanced Economies 21
Box B: Supply Chains During the COVID-19 Pandemic 24
2. Domestic Economic Conditions 29
Box C: International Border Closures, Slower Population Growth
and the Australian Economy 39
3. Domestic Financial Conditions 43
4. Inflation 63
5. Economic Outlook 71The material in this Statement on Monetary Policy was finalised on 6 May 2021. The next Statement is due for release on 6 August 2021. The Statement is published quarterly in February, May, August and November each year. All the Statements are available at www.rba.gov.au when released. Expected release dates are advised ahead of time on the website. For copyright and disclaimer notices relating to data in the Statement, see the Bank's website. The graphs in this publication were generated using Mathematica. Statement on Monetary Policy enquiries: Secretary's Department Tel: +61 2 9551 8111 Email: rbainfo@rba.gov.au ISSN 1448–5133 (Print) ISSN 1448–5141 (Online) © Reserve Bank of Australia 2021 Apart from any use as permitted under the Copyright Act 1968, and the permissions explicitly granted below, all other rights are reserved in all materials contained in this publication. All materials contained in this publication, with the exception of any Excluded Material as defined on the RBA website, are provided under a Creative Commons Attribution 4.0 International License. The materials covered by this licence may be used, reproduced, published, communicated to the public and adapted provided that the RBA is properly attributed in the following manner: Source: Reserve Bank of Australia 2021 OR Source: RBA 2021 For the full copyright and disclaimer provisions which apply to this publication, including those provisions which relate to Excluded Material, see the RBA website.
Overview
Strong global growth is expected this year and rate is expected to fall further over the forecast
next as the global economy recovers from the period, reaching around 5 per cent by the end of
pandemic. Vaccine supply is increasing, which is this year and 4½ per cent by mid 2023.
allowing some economies to ease restrictions Wages growth and inflation remain subdued
and open up. Substantial policy stimulus is also and, unlike the real side of the economy, have
supporting the recovery. But the recovery is been broadly in line with earlier expectations.
expected to remain uneven. Many economies Wages growth has been especially slow in
are contending with serious new virus outbreaks recent times, at 1.4 per cent over 2020. Headline
and the outlook for some emerging market CPI inflation was 0.5 per cent (seasonally
economies is clouded by slow rollouts of adjusted) in the March quarter. Trimmed mean
vaccines and limited scope for expansionary inflation was weak at 0.3 per cent in the quarter,
fiscal policy. and both measures were 1.1 per cent over the
In Australia, the recent activity data have been year.
significantly better than expected. Since the Most of the volatility stemming from the
previous Statement, the starting point for the introduction and expiry of pandemic-related
forecasts has been revised higher and the subsidies has washed through the quarterly
outlook further out has strengthened. GDP inflation outcomes. However, year-ended CPI
growth was faster than anticipated in the inflation for the June quarter will spike above
December quarter and is expected to have 3 per cent temporarily as the effect of measures
remained solid in the March quarter. GDP such as last year’s temporary free childcare
growth is now forecast to be 4¾ per cent over program drop out of the calculation. Higher
2021 and 3½ per cent over 2022. petrol prices will also boost inflation in the
Employment outcomes have been strong. quarter.
Employment increased by around Despite the stronger outlook for output and the
200,000 between December and March, and in labour market, inflation and wages growth are
March the unemployment rate declined to expected to remain low, picking up only
5.6 per cent, although this is still around gradually. Underlying inflation is expected to be
½ percentage point above its pre-pandemic 1½ per cent over 2021 before gradually
level. Other measures of spare capacity in the increasing to close to 2 per cent by mid 2023.
labour market, including underemployment and Some pick-up in wages growth is expected as
the share of workers on reduced hours, are the unemployment rate falls further. However, it
generally around pre-pandemic levels. Some job is likely to be some years before wages growth is
losses from the end of the JobKeeper program at a rate consistent with achieving the inflation
are anticipated, but these are expected to be target.
more than offset by demand for labour
elsewhere in the economy. The unemployment
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 1The JobKeeper program and various social Underlying inflation remains broadly steady, and
assistance measures played an important role in is still around 1½ per cent by mid 2023.
boosting household incomes over the past year. Globally, there has been a swift recovery in
While these programs have largely expired, international trade as people switched their
strong growth in employment has broadly spending away from services and towards
cushioned the effect of the winding down of goods. This has been positive for export-
these programs on household income. oriented economies including China and some
Consumption spending has therefore economies in east Asia. It has also boosted
rebounded rapidly as restrictions have eased, demand for many commodities and other
and is expected to continue expanding strongly inputs to production of final goods, such as
over the next few years. semiconductors. Oil prices have reversed the
How far households might draw on their falls of last year. The price of iron ore has
strengthened balance sheets to support their increased to be close to its historical peak a
spending represents an important source of decade ago, reflecting strong demand from
uncertainty around the outlook for consump- Chinese steel producers. Australia’s terms of
tion. This source of uncertainty forms the basis trade have increased and are expected to
for the 3 forecast scenarios presented in the remain high at least until the end of this year,
‘Economic Outlook’ chapter. Household wealth supporting national income.
has increased strongly of late, mostly because These shifts in demand, as well as disruptions to
housing prices have risen, but also because production from the pandemic, have resulted in
households accumulated an unusually large some bottlenecks and cost pressures through
amount of additional savings out of income over supply chains, both globally and in Australia.
2020. If the spending response to increased Some of these are taking time to resolve and
wealth is stronger than usual, a stronger firms are reportedly becoming more willing to
economic path than the one envisaged in the pass on cost pressures to their output prices.
baseline forecasts would eventuate. Conditions Historical experience suggests that if supply
supporting a faster pick-up in consumption problems are resolved reasonably promptly,
would also support stronger private investment. pricing pressures will remain transitory; it
In this upside scenario, the unemployment rate remains to be seen if this will be the case in the
declines and wages growth rises at a faster pace current situation. An offsetting influence on
than in the baseline scenario. Inflation picks up inflation outcomes is the subdued demand
to around 2¼ per cent by the middle of conditions in many services industries. More
2023 and remains on an upward trajectory at broadly, the current significant spare capacity in
that point. the labour market in many economies is likely to
Conversely, a weaker path could instead take a while to be absorbed. This is likely to
eventuate if higher wealth stimulates spending weigh on underlying inflation pressures globally.
by less than historical experience implies; The major central banks have all maintained
households could instead continue to highly accommodative monetary policy
strengthen their balance sheets, by purchasing settings, and reiterated their commitments to
assets or paying down debt. In this downside keep policy accommodative until sustained
scenario, subdued consumption and private progress has been made on employment and
investment result in the unemployment rate inflation. Sovereign bond yields increased earlier
remaining a little above pre-pandemic levels. in the year in response to the improvement in
the economic outlook and an increase in
2 R E S E R V E B A N K O F AU S T R A L I Ainflation expectations, which are now more in Strong demand is also a feature of the
line with central banks’ targets. Even so, financial established housing market, consistent with the
conditions remain accommodative. Corporate low level of interest rates, government support
bond spreads remain narrow and equity prices programs and the positive outlook for employ-
have risen further. ment. Housing prices are rising in all major
Fiscal policy has played an important role during markets. Prices in Sydney and Melbourne have
the pandemic, although the size and now surpassed their earlier peaks, following a
composition of this support has varied across period where they lagged the recovery in the
economies. The US authorities legislated a large smaller cities and regional areas. Price increases
fiscal stimulus in March, and further measures have been strongest for detached houses and
are also likely to be approved later in the year. higher-priced properties. Housing turnover has
Several other countries have also announced increased, and many properties are on the
additional fiscal stimulus in recent months, market for only a short time before being sold.
including to bolster the recovery phase. In this environment of strong demand for
In Australia, fiscal policy has supported incomes housing, rising prices and low interest rates, it is
and encouraged specific categories of spending. important that lending standards are
Machinery & equipment investment has been maintained. The Bank will be monitoring trends
responsive to tax incentives and has begun to in borrowing closely. Housing credit growth has
recover sooner than earlier expected. More picked up, with strong demand from owner-
generally, strong surveyed business conditions, occupiers, especially first-home buyers. Investor
high commodity prices, low interest rates and credit has also been growing, but at a slower
tax incentives should all help create the pace than credit to owner-occupiers; conditions
conditions for business investment to recover, in rental markets have been quite uneven, which
after it fell last year to its lowest share of GDP for has been weighing on investor demand for
decades. Business credit has started to increase a properties in some markets. While rents have
little recently, following a period of weakness increased strongly in some parts of the country,
while lines of credit drawn down earlier in the vacancy rates remain high in Sydney and are
pandemic were repaid. rising sharply in Melbourne. Both markets have
been affected by lower inward migration.
Dwelling investment has also been boosted –
and possibly brought forward – by accommoda- The closure of Australia’s international border
tive monetary policy and fiscal support, and the related abrupt decline in inward
including the HomeBuilder subsidy and various migration has reduced growth in some areas of
state government programs. The HomeBuilder domestic activity, especially the tourism and
subsidy closed to new applications at the end of education sectors. It has also constrained labour
March. The deadline to commence construction supply in a few sectors where temporary
was recently extended, however, so activity will migrants have typically been a relatively large
remain high over 2021. The strong demand share of the workforce, such as hospitality. While
induced by these subsidies has led to cost these effects are important in some areas, they
pressures and some delays to construction are as yet fairly small for the overall economy.
timelines. This has pushed base prices for newly The longer border restrictions remain in place,
constructed detached homes higher, but the though, the more likely that localised labour
effect on measured inflation has been offset by shortages could translate into some wage
the treatment of government construction pressures as the economy continues to
grants. strengthen.
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 3While the outlook for output and the labour the completion in September of the second
market has improved considerably since last $100 billion of purchases under the government
year, the economy remains short of full employ- bond purchase program. The Board is prepared
ment. The baseline scenario in the forecasts still to undertake further bond purchases under this
implies that inflation will remain below the program to assist with progress towards the
target range for some time. And even at the end goals of full employment and inflation.
of the forecast period in mid 2023, wages Also following its May meeting, the Board
growth is likely to remain below the rates that confirmed that the date for final drawings under
would be consistent with inflation being the Term Funding Facility is 30 June 2021. The
sustainably within the target range. Accordingly, Board had previously indicated that it would
monetary policy will need to remain highly consider extending the facility if there were a
accommodative for some time yet. marked deterioration in funding and credit
The current package of monetary policy conditions in the Australian financial system.
measures continues to support the economy in Financial markets are operating well, so an
part by keeping financing costs very low. extension is not called for. Banks have drawn
Interest rates on business and housing loans $102 billion under the facility so far and a further
continue to drift down from already low levels, $98 billion is currently available. Given the facility
which is positive for the cash flows of firms and provides funding for 3 years, it will continue to
households overall. Ample liquidity conditions help keep funding costs in Australia low until
are also supporting the supply of credit and mid 2024.
household and business balance sheets, The Board is committed to maintaining highly
including through higher asset prices. As well as supportive monetary conditions to support a
lowering domestic funding costs, by lowering return to full employment in Australia and
the structure of interest rates, the policy package inflation consistent with the target. It will not
is contributing to a lower exchange rate than increase the cash rate until actual inflation is
otherwise. The Australian dollar has moved sustainably within the 2 to 3 per cent target
within a narrow range since the start of the year, range. For this to occur, the labour market will
a period in which commodity prices have need to be tight enough to generate wages
tended to increase. Together, monetary and growth that is materially higher than it is
fiscal policy are supporting the recovery in currently. This is unlikely to be until 2024 at the
aggregate demand and the pick-up in employ- earliest.
ment.
At its recent meetings, the Reserve Bank Board
has decided to maintain the targets of 10 basis
points for the cash rate and the yield on 3-year
Australian Government bonds. In May, the Board
announced that it will consider at its July
meeting 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; in either case, the 10 basis point
target will be maintained. At its July meeting, the
Board will also consider whether to undertake
further government bond purchases following
4 R E S E R V E B A N K O F AU S T R A L I A1. The International Environment
A durable global economic recovery has considerably following substantial additional
become more likely since the February fiscal stimulus, a drop in infection rates and
Statement on Monetary Policy. Progress with good progress in the vaccination rollout.
vaccinations, additional fiscal policy support in Ongoing strong demand for goods continues to
many economies and ongoing accommodative support the recovery in China and export-
monetary policy have improved prospects for a oriented economies in east Asia. The prospects
strong recovery this year. Even so, the outlook for recovery have mostly firmed elsewhere but
will remain highly uncertain and uneven for ongoing activity restrictions will continue to
some time. GDP is expected to remain well weigh on activity in the near term in some
below its pre-pandemic trajectory in many economies and the increase in sovereign yields
economies and labour market slack will take in advanced economies is likely to hamper the
time to be absorbed. This is likely to keep recovery of some emerging market economies.
underlying inflationary pressures contained, The speed and strength of recovery have
although the rebound in commodity and higher diverged across economies of late because
input prices more generally will contribute to vaccine rollouts are proceeding at different rates
higher inflation in the near term. and control over the virus more generally has
The market-implied path of expected central varied widely. Significant shares of the
bank policy rates has shifted a little higher in a population have been vaccinated in only a few
number of economies in response to the economies (Graph 1.1). While vaccine supplies
improved economic outlook. Central banks have are expected to increase soon in most advanced
responded to these developments by restating economies, they will remain limited in many
their commitment to maintain very emerging market economies, hampering their
accommodative monetary policy settings until recoveries. In particular, India is experiencing a
there has been a sustainable increase in inflation significant surge in cases and the near-term
that is consistent with targets, and by outlook is highly uncertain.
emphasising that this is likely to be some way The GDP of Australia’s major trading partners is
off. Financial conditions in advanced economies expected to grow by around 7 per cent in
remain very accommodative overall, despite an 2021 and by 4½ per cent in 2022 in year-average
increase in government bond yields. Corporate terms (Graph 1.2). Households and firms have
bond yields remain around historically low continued to adapt to containment measures.
levels, issuance conditions are favourable, and Stronger-than-expected outcomes in some
equity prices have increased further. economies in the March quarter have broadly
offset the effects of tightened or extended
The global outlook has firmed up containment measures in a number of other
The global economic recovery is well underway. economies. Further out, the economic recovery
The outlook for the US economy has picked up in Australia’s major trading partners is expected
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 5to be sustained by control of the virus through economies because of its extensive fiscal
vaccinations, as well as ongoing monetary and support and rapid vaccination rollout. Longer-
fiscal policy support and the rebound in global term US Government bond yields have
trade. increased as a result of the improved economic
Even with a strong recovery, GDP in many outlook. The latest US fiscal package is expected
economies is expected to remain well below its to boost GDP in the rest of the world by around
pre-pandemic trajectory over coming years. ½ percentage point, with the strongest effects in
Significant spare capacity is therefore expected economies with the largest direct trade links
to persist in these economies. Consistent with such as Canada and Mexico.
this, price pressures should remain contained for The outlook for the other major advanced
some time, with underlying measures of economies has improved, although the recovery
inflation still expected to be below central bank is likely to be slower than in the United States,
targets for a number of years. partly because fiscal policy is less stimulatory.
The United States is expected to recover faster Good progress on vaccinations has lifted the
and further than other large advanced near-term economic outlook in the United
Kingdom, and a similar boost to activity is
anticipated for the euro area when more of the
Graph 1.1 population are vaccinated. The outlook for Japan
Vaccinations* has been bolstered by strong external demand
Per cent of population, at least one dose
% %
Israel
but the recent increase in infections may
United Kingdom
50 50 temporarily slow the recovery.
Singapore
25 25 The outlook in east Asia continues to be
United Canada Euro area
States supported by two main factors: strong global
% %
Brazil demand for goods buoying export-oriented
10 10
New Zealand India
economies, and success in lowering infections in
5 5 some economies in the region. Chinese GDP is
China Australia expected to remain close to its pre-pandemic
0 0
D J F M A M trajectory, with growth expected to rebalance
2020 2021
* Total doses divided by 2 for Australia and China away from the industrial sector towards services
Sources: Our World in Data; RBA
and household consumption. However, some
emerging market economies in the region,
Graph 1.2 including the Philippines and Thailand, are
Australia’s Major Trading Partner GDP currently facing significant surges in infections
March quarter 2019 = 100
index index
and have limited vaccine supplies, which will
Forecasts
delay their recoveries. Vaccination rollouts have
110 110
been slow in many east Asian countries.
Feb 2020 Current
SMP
105 105 The recovery in many other emerging market
economies is expected to take longer and be
100 100
more variable because of limited vaccine
95 95
supplies, surging infections, limited policy
flexibility and tighter global financial conditions
90
2019 2020 2021 2022
90 (see ‘Box A: Emerging Market Vulnerabilities and
Sources: ABS; CEIC Data; Consensus Economics; RBA; Refinitiv Financial Conditions in Advanced Economies’).
6 R E S E R V E B A N K O F AU S T R A L I ARisks to the global outlook overall have become Recent economic outcomes have varied
more balanced, but significant uncertainties across countries
remain: Uneven vaccination progress and differences in
• The speed of vaccine rollouts will affect the containment measures have contributed to
speed of the recovery. Slower vaccination divergences in activity recently. High vaccination
rates will require containment measures to rates have allowed a few economies, including
fight increases in infections. Conversely, a Israel, the United Kingdom and the United
faster rollout of effective vaccination States, to start easing restrictions without
programs will allow activity to resume more infections and hospitalisations increasing
rapidly. The potential emergence and spread significantly (Graph 1.3). However, infections
of vaccine-resistant COVID-19 virus variants have increased sharply in many other countries,
is a key downside risk. which has led to tighter containment measures.
Infections have increased rapidly in India,
• The stimulatory effects of fiscal policy on
accounting for more than two-fifths of the
activity, particularly in the United States,
global increase in reported cases in recent
could be larger than expected. A stronger
weeks. Authorities in the worst-affected states
pick-up in US activity could increase
have introduced restrictions on services activity
inflationary pressures by more than
to reduce the virus’s spread, but healthcare
expected, pushing up US bond yields and
systems are under strain.
leading to a tightening in US and global
financial conditions. Global supply chain March quarter activity in the United States has
pressures may also persist if the sharp been boosted by the substantial direct
rebound in demand is sustained longer than payments to households since December.
expected, which could result in higher Goods consumption has remained strong and
inflation persisting for longer than expected. services consumption has started to recover as
containment measures have been wound back.
• The extent of recoveries in consumption will
Unlike in most other economies, business
depend on households’ response to
investment in the United States has rebounded
changes in income and their willingness to
to above pre-pandemic levels as businesses plan
spend out of recent increases in wealth and
for growth in domestic demand.
the additional savings accumulated in the
past year. Experience from countries where
activity restrictions have eased suggests that Graph 1.3
spending bounces back quickly once COVID-19 – New Cases
Per 100,000 population, smoothed
consumption possibilities are restored. no
United Kingdom
no
Reduced uncertainty, stronger wages 60
United States
60
Euro area
growth and higher asset prices could also
30 30
boost consumption by more than expected Brazil
India
in the period ahead. But in countries where no no
Japan Indonesia
incomes have fallen or restrictions have 4 4
persisted for an extended period, Australia
South Korea
2 2
precautionary saving could remain high and
slow the overall recovery. 0 0
F M A M J J A S O N D J F M A M
2020 2021
Sources: Johns Hopkins CSSE; RBA
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 7Strong external demand for goods continued to economies saving ratios have declined from
underpin the recovery in the March quarter in their peak in the June quarter last year as
China and export-oriented Asian economies. households have purchased more goods and
Domestic demand also picked up in the quarter restrictions on services have started to be lifted.
in South Korea as containment measures were US household savings increased strongly in the
eased, but activity remains subdued in parts of March quarter following further fiscal support for
the region where infections have been more household incomes.
widespread.
Elsewhere, the economic recovery stalled in the Fiscal policy is highly expansionary in
March quarter (Graph 1.4). Ongoing the United States and remains
containment measures have weighed on supportive in many other economies
economic activity in large parts of Europe and In March, the United States legislated the latest
Japan. GDP contracted in the March quarter in tranche of its very significant fiscal response to
the euro area, and is expected to have declined the pandemic, focused on further supporting
in Japan and the United Kingdom. Activity household incomes. This brought the total US
weakened in some large emerging market fiscal response to about 25 per cent of GDP,
economies, including Brazil and South Africa, which has been by far the largest direct fiscal
due to a rebound in infections, renewed response to the pandemic (Graph 1.6). Fiscal
containment measures and tighter financial policy continues to support private incomes and
conditions in these economies. the health responses in a range of other
Households across many advanced economies countries. Canada, Germany, the United
substantially increased their savings over the Kingdom, China and some east Asian economies
past year, as the consumption of services have extended existing acute-phase fiscal
declined and fiscal policy supported household measures and rolled out new initiatives. Some
incomes (Graph 1.5). Households have emerging economies have also provided further
continued to save more of their income than fiscal support but on a smaller scale.
they did prior to the pandemic, but in most Fiscal measures this year have generally been
smaller than last year since private incomes have
needed less support as economic activity has
Graph 1.4
adapted somewhat to containment measures.
GDP Growth*
From December 2019 to March 2021
% %
Graph 1.5
5 5
Household Saving Ratio
Deviation from 2015–19 average ratio
ppt ppt
0 0
Canada
-5 -5 20 20
Australia
-10 -10
10 10
-15 -15 Japan United
Taiwan
China
Vietnam
Hong Kong
India
Brazil
Canada
South Korea
New Zealand
Australia
Singapore
Indonesia
Poland
Russia
Japan
Malaysia
Thailand
Euro area
Philippines
United States
United Kingdom
Germany France States
0 0
United
Kingdom
-10 -10
*
M J S D M J S D M
Forecasts used where March quarter GDP has not yet been reported
2019 2020 2021
Sources: ABS; Bloomberg; CEIC Data; Consensus Economics; RBA;
Refinitiv Sources: Cabinet Office Japan; RBA; Refinitiv
8 R E S E R V E B A N K O F AU S T R A L I AAs a result, fiscal deficits are expected to be states announced detailed plans for the EU
smaller in many economies, with the exception Recovery and Resilience facility, to be used for
of some large economies like the United States infrastructure, ‘green’ investment and digitisation
and Germany. Fiscal support in many economies over the next 5 years.
is also expected to begin to shift from
supporting incomes during the acute phase of The global recovery has been
the downturn, towards public investment in concentrated in goods demand, which
infrastructure in the post-pandemic recovery. has boosted trade in Asia …
Further broad-based fiscal packages involving Global goods trade has recovered very quickly,
multi-year spending and tax measures are being driven by strong durable consumer goods
pursued in the United States. These include imports in advanced economies as households
initiatives for infrastructure investment have substituted away from services consump-
(equivalent to 9 per cent of GDP) and social tion during the pandemic. This has supported
initiatives (equivalent to 10 per cent of GDP) that activity in economies with significant manufac-
will largely be funded over time by increased turing and goods exporting sectors, including in
taxes on corporations and higher-income Asia and parts of Europe (Graph 1.8). Exports
individuals (Graph 1.7). These packages should from Asia have surged by 23 per cent since the
further boost US activity and inflationary pandemic started, while global exports are just a
pressures, although the effects may be drawn little above pre-pandemic levels. The sharp
out. Over time, the infrastructure spending will rebound in trade and its unevenness has
expand the capacity of the US economy and strained global supply chains (see ‘Box B: Supply
some of the social initiatives may increase labour Chains during the COVID-19 Pandemic’). Supply
supply, which would dampen inflationary disruptions have contributed to some upward
pressures in the future. price pressures in select areas; these are
A few other economies have also unveiled expected to be temporary and ease once
further measures to support their post- bottlenecks are alleviated. Supply shortages of
pandemic recovery. Canada plans to boost key components have also disrupted some
childcare and ‘green’ projects. Most EU member
Graph 1.7
Recovery Phase Direct Fiscal Support*
Graph 1.6 Per cent of 2019 GDP
Italy**
Acute Phase Direct Fiscal Support* Spain**
Per cent of 2019 GDP, date of announcement
% % United States**
United States South Korea
Australia
20 20
Canada** France
Germany Canada**
15 15
Germany
Japan
United
United Kingdom
Australia Kingdom
10 10 Japan
New
New Zealand
Zealand
Spain Hong Kong
5 5
High-income France Singapore
east Asia Italy 0 5 10 %
0 0 Public investment and investment incentives Consumption incentives
M J S D M J M J S D M J Training programs Other recovery measures
2020 2021 2020 2021
* Fiscal measures aimed for the recovery phase, i.e. after the pandemic has
* Includes state government stimulus for Australia, Canada and passed; includes state governments for Australia, Canada and Germany;
Germany; excludes loan guarantees, unallocated funds, public includes EU Recovery and Resilience Facility funds for EU countries where
investment and consumption incentives spending plans are available; expected to be spent over multiple years
** April 2021 increase is not yet approved ** Proposed support not yet approved
Sources: IMF; national sources; RBA; Refinitiv Sources: IMF; national sources; RBA; Refinitiv
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 9(a)
Table 1.1: Commodity Price Changes
Per cent
Since previous Statement Since start of year
Bulk commodities 8 16
– Iron ore 16 18
– Coking coal –27 9
– Thermal coal 5 10
Rural 5 11
Base metals 19 21
Gold 0 −5
Brent crude oil(b) 17 34
RBA Index of Commodity Prices (ICP) 8 10
– Using spot prices for bulk commodities 8 13
(a) Prices from the RBA Index of Commodity Prices (ICP); bulk commodity prices are spot prices
(b) In US dollars
Sources: Bloomberg; IHS; RBA
upstream production. For example, Australia’s key commodity exports. Iron ore,
semiconductor shortages have hampered thermal coal and oil prices have all increased
production in a wide variety of sectors, leading further since the previous Statement, while a
to production delays and temporary closures of number of other commodity prices are also
motor vehicle assembly lines. higher (Table 1.1).
The benchmark iron ore price has increased by
… and the recovery continues to 16 per cent since the previous Statement to be
support commodity prices at its highest level in a decade (Graph 1.9).
The global economic recovery and ongoing Demand for iron ore has been supported by the
strength in Chinese steel production have continued strength in Chinese steel production,
continued to support the prices of a number of and steel mills continue to build iron ore
inventories while profit margins are elevated.
Chinese authorities have signalled a desire to
Graph 1.8 keep steel output in 2021 capped at or below
Global Goods Trade and Production 2020 levels, which may put downward pressure
Average since 2006 = 100
index index on iron ore prices in the second half of this year.
Industrial production Steel mills in some steel-producing cities in
115 115
China have been instructed to lower production
for the remainder of the year to reduce
100 100
emissions. On the supply side, recent cyclone
activity has reduced iron ore production in
85 85
Western Australia, while market expectations for
Trade Brazilian exports for the remainder of this year
70 70
2009 2013 2017 2021 have been revised down following recent lower-
Sources: RBA; Refinitiv
than-expected production.
10 R E S E R V E B A N K O F AU S T R A L I AThe Newcastle thermal coal spot price has Chinese economic activity moderated in
increased to be 10 per cent higher since the the March quarter, but remains around
start of the year. The price has been supported its pre-pandemic trajectory
by a recovery in global demand and supply China has experienced one of the strongest
disruptions from weather-related damage to economic recoveries globally. However,
coal transport infrastructure in New South Wales. renewed outbreaks of COVID-19 temporarily
Meanwhile, coking coal prices have decreased weighed on growth in parts of the economy in
since the previous Statement and remain at a the March quarter. Household consumption
significant discount relative to domestic Chinese growth moderated, at least partly as a result of
prices, in part because of the ongoing travel restrictions over Chinese New Year in the
uncertainty surrounding Chinese demand for north and east (Graph 1.11). Household
Australian coal. expenditure on services, such as entertainment,
The price of Brent crude oil has increased further tourism and transport, fell in the March quarter
since the previous Statement (Graph 1.10). even as demand for goods continued to rise.
OPEC+ members recently agreed to gradually The weakness appears to have been
increase output over the coming months amid a concentrated in January, and retail sales
more positive outlook for global demand. The increased in February and March as the
increase in oil prices over recent quarters will restrictions were eased, particularly for eating
also support the price of Liquefied Natural Gas out.
(LNG) received by Australian exporters, which is Industrial production continued to grow
contractually linked to the price of oil with a lag. strongly over the first quarter as many workers
The prices of some base metals, notably remained in cities over the Chinese New Year
aluminium and copper, have increased strongly holiday period. Similar to other economies in the
in recent months, supported by the continued region, industrial production has been
recovery in global industrial production. supported by strong global demand for goods.
Investment in infrastructure and real estate also
continued to grow. These factors have
supported an increase in steel production and
demand for iron ore imports, including from
Australian producers who are the largest
Graph 1.9 Graph 1.10
Bulk Commodity Prices Commodity Prices
USD, 2015 average = 100 US$/b Brent oil US$/b
index index 120 120
Coking coal Iron ore 90 90
300 300 60 60
30 30
index Base metals* index
200 200
120 120
Copper Aluminium
100 100
100 100 80 80
Thermal coal 60 60
Nickel
40 40
0 0 2013 2015 2017 2019 2021
2011 2013 2015 2017 2019 2021 * SDR; January 2012 = 100
Sources: Bloomberg; IHS Markit; RBA Sources: Bloomberg; RBA
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 11suppliers to China (Graph 1.12). While GDP a small fiscal consolidation in 2021. The
growth is expected to be strong over the authorities have also said that any withdrawal of
remainder of this year, steel production growth monetary stimulus will be gradual. In particular,
is likely to slow as emissions policies and other support for smaller firms will continue for some
factors encourage a shift away from heavy time. At the same time, the authorities have
industry towards services. emphasised that reducing risks in the financial
system remains a priority. Policymakers have set
Fiscal and monetary policies remain a target of keeping overall debt levels in the
accommodative in China but authorities economy stable relative to GDP in 2021,
are alert to financial risks following notably higher growth in debt last
Policymakers in China have indicated that the year.
moderately accommodative macroeconomic Chinese financial conditions remain broadly
policy settings currently in place remain accommodative, which is consistent with policy-
appropriate. This was reflected in the annual makers’ stated desire for policy stability in 2021.
budget released in March, which projected only In contrast to developments in other emerging
markets, financial conditions in China have been
little affected by the rise in sovereign bond
Graph 1.11 yields in advanced economies. Chinese govern-
China – Activity Indicators* ment and corporate bond yields have been
Nominal, December quarter 2019 = 100
index index broadly stable around pre-pandemic levels in
Industrial production (real) recent months (Graph 1.13). Bank lending
120 120
Government expenditure conditions also remain favourable: interest rates
110 110 on business loans remain low, and lending to
Goods exports
businesses and households grew strongly in the
100 100
first quarter of this year despite the
Household
90
consumption
90
implementation of new regulations to limit the
flow of credit to the property sector. This has
80
D M J S D M
80 contributed to growth in total social financing
2019 2020 2021
slightly outpacing growth in nominal GDP in the
* Seasonally adjusted by the RBA
Sources: CEIC Data; RBA first quarter of the year (Graph 1.14). On the
other hand, Chinese equity prices have declined
sharply since mid February following comments
Graph 1.12 from regulators warning investors of asset
China – Steel Production and Iron Ore Imports*
Monthly bubbles. Conditions have also tightened
Mt Mt
Crude steel production Iron ore imports modestly for Chinese corporations that issue
US dollar bonds offshore in the past month, as
90 90
concerns have risen that a large finance firm
Total (which is majority owned by the Chinese state)
60 60
might default on its debt in that market.
From Australia
30 30
The Chinese renminbi has been little changed
against the US dollar over recent months and
0 0
remains close to its recent highs (Graph 1.15).
2011 2016 2021 2011 2016 2021
* Seasonally adjusted by the RBA
This has occurred despite the interest rate
Sources: CEIC Data; RBA
differential between government bonds in
12 R E S E R V E B A N K O F AU S T R A L I AChina and those in the United States having authorities have imposed curfews and partial
declined and foreign inflows to Chinese bond lockdowns. The measures introduced to date are
markets easing. Authorities have recently noted less restrictive than the measures imposed in
potential risks associated with rising yields in early 2020, which is evident in a smaller decline
advanced economies and the possibility of large in mobility measures (Graph 1.16). At this stage,
capital outflows. However, they also highlighted the restrictions are targeted at curbing service-
that risks to domestic markets are low and they sector activity in hospitality, tourism and
will continue to proceed with a gradual opening transportation, with manufacturing and
up of capital flows. construction activity less affected. Activity is
expected to decline in the June quarter. In
India is experiencing a new wave of response to the worsening health situation, the
infections and activity will decline over Reserve Bank of India has announced a number
the near term of policy measures to help support financial
India is experiencing a rapid increase in conditions, including a commitment to
COVID-19 cases. In the worst-affected states, purchase a set quantity of government bonds
and incentives for financial institutions to
provide credit to small businesses. Over the
Graph 1.13 medium term, the government’s commitment
Chinese Bond and Lending Markets to raise infrastructure investment and continued
% Bond yields %
Lending rates
5-year maturity
Low-rated corporate* urbanisation should support Indian economic
General bank lending rate***
growth and demand for commodities.
6 6
High-rated
Average
corporate**
mortgage rate
Significant labour market slack remains
3 3
and will take some time to be absorbed
PBC medium-term Significant spare capacity remains in labour
Government lending facility
markets in advanced economies despite the
0 0 rebound in employment over recent quarters.
2018 2021 2018 2021
* Based on domestically rated AA- corporate bonds
** Based on domestically rated AAA corporate bonds
Employment-to-population and participation
*** Business rate proxy
Sources: Bloomberg; CEIC data; RBA
rates remain well below pre-pandemic levels
and unemployment rates are elevated in most
Graph 1.14
China – Total Social Financing Growth Graph 1.15
Year-ended
% % Chinese Exchange Rates
index yuan
Yuan per US$
104 6.4
(RHS, inverted)
100 6.8
30 30 Trade-weighted
96 7.2
index* (LHS)
bps China-US interest rate differential** bps
300 300
20 20
200 200
Total*
100 100
10 10 CNYb Change in foreign holdings of Chinese bonds CNYb
200 200
100 100
0 0
0 0
2009 2012 2015 2018 2021 -100 -100
2018 2019 2020 2021
* Measure targeted by authorities; government bond issuance includes
* Indexed to 1 January 2018 = 100
refinancing of debts previously included elsewhere in TSF; RBA
estimated prior to 2016. ** 5-year government bond yields
Sources: CEIC Data; RBA Sources: Bloomberg; CEIC; China Foreign Exchange Trade System
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 13advanced economies (Graph 1.17). It will take improvement across many economies has been
some time for spare capacity to be absorbed most pronounced in healthcare and manufac-
even as containment measures are eased. Wage turing, consistent with the strength in global
subsidies continue to preserve employer- goods demand. Hiring intentions have lifted
employee relationships and support incomes in even in economies that are still under strict
many economies, and wages growth in some containment measures as firms anticipate an
large advanced economies slowed only a little increase in demand later in the year.
over the past year.
Labour demand has picked up in some Underlying inflation is expected to
advanced economies and survey indicators such remain below most central bank targets
as job ads and employment expectations point for the next few years
to a further and broader pick-up in coming Underlying consumer price inflation in
months (Graph 1.18). By sector, the advanced economies remains low. Some
measures of inflation will increase in the coming
months because of higher commodity prices
Graph 1.16
and cost pressures associated with bottlenecks
India – COVID-19 Indicators
2020 peak = 100 in global manufacturing and shipping; surveyed
index Daily COVID-19 cases index
400 400 measures of inflationary pressures in manufac-
300 300 turing are elevated globally (Graph 1.19). Year-
200 200
ended inflation rates will be also boosted in the
100 100
near term by the unwinding of some COVID-19
index Population mobility* index
Other states -related price reductions.
100 100
75 75 Later in the year, inflation is expected to ease
Worst-affected states
50 50 again in most economies as the increase in oil
25 25 prices washes out and some of the temporary
F M A M J J A S O N D J F M A M
2020 2021 bottlenecks in global supply chains are resolved.
* Average of Google retail, grocery, workplace and transit station
mobility data; worst-affected states are the 10 states with the highest In most economies, spare capacity in labour
active COVID-19 cases per capita; as of 4 May 2021
Sources: CEIC Data; RBA markets is likely to contain inflationary pressures
for some time. Spare capacity in the United
Graph 1.17
Labour Market Indicators
ppt
Change since February 2020
ppt
Graph 1.18
Employment-to-population Participation rate
ratio Job Ads*
Change since 1 January 2020
Latest % %
0 0 United States Germany
20 20
0 0
-4 -2 -20 -20
-40 -40
% United Kingdom Japan %
-8 -4
20 20
Trough 0 0
-12 -6 -20 -20
Canada
Japan
Euro area
Japan
United States
Australia
Euro area
Canada
United Kingdom
New Zealand
United States
Australia
United Kingdom
New Zealand
-40 -40
-60 -60
M J S D M J M J S D M J
2020 2021 2020 2021
* Job ads posted on Indeed
Sources: ABS; CEIC Data; RBA; Refinitiv Sources: Indeed; RBA
14 R E S E R V E B A N K O F AU S T R A L I AStates is expected to be absorbed more quickly Government bond yields have increased
than elsewhere; business surveys suggest that due to the improved economic outlook
inflationary pressures are already picking up in and higher inflation expectations
the US services sector. The US Federal Reserve Longer-term government bond yields have risen
(Fed) expects its target measure of US inflation noticeably since early February in most
to increase and moderately exceed 2 percent in advanced economies, following the passage of
2021 and then run close to 2 per cent in 2022, fiscal stimulus measures in the United States and
which will move inflation towards the Fed’s goal further improvements in the economic outlook
of inflation averaging 2 per cent over time. more generally (Graph 1.21). In contrast, govern-
Measures of US inflation expectations have ment bond yields with maturities of up to
increased recently to be consistent with the 2–3 years have remained low, consistent with
Fed’s goal, while in some other advanced market expectations that policy rates will remain
economies financial markets’ and economists’ low for a prolonged period. Yields on longer-
expectations remain below central bank targets term bonds in most advanced economies
(Graph 1.20). experienced heightened volatility in late
February amid a decline in market liquidity and
significant bond issuance, but bond markets
have generally been more stable since March.
Graph 1.19 Yields on New Zealand Government bonds also
PMI Survey Output Prices
Net balance of changes from previous month, smoothed experienced large moves in March alongside
index index
Manufacturing Services sharp revisions to policy rate expectations
United Kingdom
following government announcements of
60 60
United States measures to curb growth in housing prices
(discussed below).
50 50
Euro area
Compensation for expected future inflation has
Japan
40 40
increased across all bond maturities since yields
began rising in early November, from near
30 30
record lows to levels more consistent with
2011 2016 2021 2011 2016 2021
Sources: RBA; Refinitiv
central bank inflation targets. Real yields have
decreased at the 5-year maturity and have
Graph 1.20
Graph 1.21
Core Inflation and Expectations
Year-ended, expectations 5 to 10 years ahead 10-year Government Bond Yields
% % % %
United States Euro area Japan
1.5 1.5
US Australia
Market
1.0 1.0
Economists’
2 2
0.5 0.5
UK Canada
% %
Core inflation*
1.5 0.5
0 0 Japan
1.0 0.0
NZ Germany
0.5 -0.5
-2 -2 0.0 -1.0
2017 2021 2017 2021 2017 2021 M J S D M J M J S D M J
* Personal consumption expenditure inflation for the United States
2020 2021 2020 2021
Sources: Bloomberg; Consensus Economics; RBA; Refinitiv Sources: Bloomberg; Yieldbroker
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 15increased or remained steady at the 10-year rate increase in response to an improved
maturity in most advanced economies over the economic outlook, though in most cases the
same time frame (Graph 1.22).[1] This is first policy rate increase is still not expected for
consistent with central banks’ forward guidance some time. Norges Bank stated that it now
that policy rates will not be raised until there is a expects to raise its policy rate in the second half
substantial and sustained increase in inflation. In of this year, earlier than previously expected. The
the euro area and Japan, real yields have Bank of Canada (BoC) has stated that it remains
decreased at longer maturities since November, committed to holding the policy rate at its
because inflation is expected to remain below current level until inflation returns to 2 per cent
central bank targets for longer than in other on a sustained basis. The BoC now expects this
advanced economies. condition to be met in the second half of 2022,
brought forward from 2023. In the United States,
Central banks in advanced economies most Federal Open Market Committee (FOMC)
have restated their commitment to a participants continued to expect the policy rate
prolonged period of substantial support to remain unchanged until at least end 2023,
At recent meetings, most central banks have though a few participants brought forward their
reaffirmed their commitments to an extended expectations of the first policy rate increase to
period of support through very low policy rates, 2022 in response to improved economic
asset purchases and lending programs. Given forecasts. The FOMC said that the current
announced measures, central bank balance economic outlook did not warrant policy
sheets will continue to grow for some time tightening and that the Fed will be monitoring
(Graph 1.23). Most central bank officials actual, not forecast, progress towards its employ-
observed that the rise in longer-term govern- ment and inflation goals to judge the
ment bond yields is consistent with the appropriate time to raise the policy rate.
improved outlook for economic activity and The market-implied path of expected policy
inflation, but that policy needs to remain very rates has shifted higher in a number of
supportive for an extended period to achieve a advanced economies, and the expected timing
sustainable increase in inflation. of the first policy rate increase has been brought
A couple of central banks have adjusted their forward (Graph 1.24). Current market pricing
guidance on the expected timing of a policy suggests that the BoC is expected to raise its
policy rate in the second half of 2022 and the
Graph 1.22
Change in Government Bond Yields
Graph 1.23
November 2020 to May 2021 Central Bank Total Assets
bps US UK bps Per cent of GDP
100 100 % %
50 50
125 25
0 0
Japan
Sweden NZ
-50 -50 100 20
bps Canada Germany bps
75 15
100 100
Australia
50 50 Euro area
50 10
0 0
UK
-50 -50 25 5
Canada
-100 -100 US
5 year 10 year 5 year 10 year
0 0
Nominal yield Inflation compensation Real yield 2017 2021 2017 2021
Source: Bloomberg Sources: Central banks; RBA; Refinitiv
16 R E S E R V E B A N K O F AU S T R A L I AReserve Bank of New Zealand (RBNZ) is outlook for economic growth and inflation. The
expected to raise its policy rate in late 2022 or BoC noted that further adjustments will be
early 2023, while the US Fed and the Bank of gradual and guided by its ongoing assessment
England are expected to raise policy rates in the of the strength and durability of the recovery.
first half of 2023. In Australia, market pricing Other central banks in advanced economies
suggests that the cash rate is expected to have continued to purchase assets at a steady
remain around its current low rate for the pace in recent months (Graph 1.25).
coming 2 years and increase to around 50 basis The New Zealand Government directed the
points over 2023. In the euro area and Japan, RBNZ to consider the impact on housing prices
market pricing continues to indicate investors when making monetary and financial stability
expect no change to policy rates for at least policy decisions. Under these changes, the
several years. Monetary Policy Committee’s targets will not
Central banks in advanced economies continue change, but the RBNZ will outline the effect of
to provide substantial additional stimulus its monetary policy decisions on the govern-
through asset purchases, though in recent ment’s objectives relating to sustainable house
months some central banks have altered the prices. The RBNZ’s financial stability policies will
pace of purchases. The European Central Bank take into account the government’s objectives.
(ECB) announced an increase in the pace of The New Zealand Government subsequently
asset purchases under its Pandemic Emergency announced a range of measures to dampen
Purchase Programme (PEPP) in March, and said it investor housing demand and boost housing
will maintain a higher purchase pace in the supply.[2] In response, market participants scaled
second quarter of the year. The ECB noted that back expectations that the RBNZ would increase
this was in response to the risk that rising its policy rate more quickly than other advanced
government bond yields could lead to a economies.
premature tightening of financing conditions at The Bank of Japan implemented a number of
a time when underlying inflation pressures recommendations following a review of the
remain subdued. In contrast, as was widely effectiveness and sustainability of its monetary
expected, the BoC reduced its target for govern-
ment bond purchases from C$4 billion to
C$3 billion per week to reflect progress made in Graph 1.25
the economic recovery, including an improved Central Bank Government Bond Holdings*
Per cent of GDP**
% %
Japan
80 80
Graph 1.24
Policy Rate Expectations 60 60
% %
2 2
US 40 40
NZ UK
1 1
Euro area*** NZ
Japan
0 0 20 20
Start February US Canada
Euro area Australia
Sweden
% %
0 0
2 2 2017 2019 2021 2017 2019 2021
Canada Australia * Central government debt only for all countries except the euro area.
1 1 Dashed lines represent forecasts based on announced purchase
programs or recent pace of purchases
UK ** Four-quarter rolling sum; forecasts are based on the IMF's World
0 0
Economic Outlook
*** Holdings data for euro area only include bonds held as part of asset
-1 -1 purchase programs; holdings for other central banks also include
2021 2024 2021 2024 bonds held for operational or liquidity purposes
Sources: Bloomberg; RBA Sources: Central banks; IMF; RBA; Refinitiv
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 2 1 17policy measures. These included adjustments to yield curve and improved economic outlook are
its yield curve control framework to improve expected to support bank profitability. Equity
market functioning and a new interest rate issuance remains elevated in the United States,
tiering scheme to mitigate the impact of driven by so-called ‘blank-cheque’ vehicles
negative interest rates on bank profitability. (Special Purpose Acquisition Companies
Some other central banks, including the ECB and (SPACs)), which raise funds to identify and invest
the BoC, will undertake or announce the results in private companies to take public. However,
of reviews of monetary policy frameworks and SPAC issuance slowed substantially in April. This
tools later this year. is possibly linked to an increased risk of
regulatory intervention as well as a decrease in
Corporate funding conditions in funding available from institutional investors
advanced economies remain that is typically used alongside SPAC funding to
accommodative help finance acquisitions.
Corporate bond yields remain around
historically low levels, even though they have
increased for some borrowers in recent months
as a result of the rise in sovereign bond yields.
Yields on investment grade corporate bonds
denominated in US dollars increased by around
Graph 1.26
35 basis points from their recent lows, while
Corporate Bond Yields
yields on euro-denominated investment grade %
Investment grade Sub-investment grade
%
bonds are around 15 basis points higher 6 12
(Graph 1.26). Sub-investment grade yields 5 10
remain close to record lows, as higher risk-free 4 8
interest rates have been offset by a substantial
3 6
USD
narrowing in credit spreads. Spreads have
2 4
narrowed most for firms in sectors that were
1 2
disproportionately affected by the pandemic EUR
and which tend to have lower credit ratings, 0
2018 2021 2018 2021
0
such as energy, travel and leisure, and industrials. Source: ICE data is used with permission
Corporate bond issuance has remained robust
over the year to date, particularly for sub-
Graph 1.27
investment grade bonds.
Equity Prices
Equity prices have increased further in recent 1 January 2020 = 100
index index
months (Graph 1.27). Expectations that stronger
US
economic growth will lift future earnings have 120 120
Japan
generally outweighed the effect of higher yields Canada
on sovereign debt, which reduce the discounted 100 100
Europe
value of those future earnings. Shares of
companies that are more sensitive to the UK
80 80
economic outlook – such as companies that
produce capital equipment – have 60 60
J F M A M J J A S O N D J F M A M J J
outperformed the broader market. Bank share 2020 2021
prices have also outperformed as the steeper Source: Bloomberg
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