Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent. It also decided to cease further purchases under the bond purchase program, with the final purchases to take place on 10 February.

The Omicron outbreak has affected the economy, but it has not derailed the economic recovery. The Australian economy remains resilient and spending is expected to pick up as case numbers trend lower. The RBA's central forecast is for GDP growth of around 4¼ per cent over 2022 and 2 per cent over 2023. This outlook is supported by household and business balance sheets that are in generally good shape, an upswing in business investment, a large pipeline of construction work and supportive macroeconomic policy settings. The main source of uncertainty continues to be the pandemic.

The labour market has recovered strongly, with the unemployment rate declining to 4.2 per cent in December. Hours worked are estimated to have declined significantly in January due to the Omicron outbreak, but high numbers of job vacancies suggest further gains in employment over the months ahead. The RBA's central forecast is for the unemployment rate to fall to below 4 per cent later in the year and to be around 3¾ per cent at the end of 2023.

Wages growth has picked up but, at the aggregate level, has only returned to the relatively low rates prevailing before the pandemic. A further pick-up in wages growth is expected as the labour market tightens. This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of wages at historically low levels of unemployment.

Inflation has picked up more quickly than the RBA had expected, but remains lower than in many other countries. The headline CPI inflation rate is 3.5 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions to global supply chains. In underlying terms, inflation is 2.6 per cent. The central forecast is for underlying inflation to increase further in coming quarters to around 3¼ per cent, before declining to around 2¾ per cent over 2023 as the supply-side problems are resolved and consumption patterns normalise. One source of uncertainty is the persistence of the disruptions to supply chains and distribution networks and their ongoing effects on prices. It is also uncertain how consumption patterns will evolve and how this will affect the balance of supply and demand, and hence prices.

Financial conditions in Australia remain highly accommodative. Together, the RBA's bond purchase program, the funding provided under the Term Funding Facility and the low level of interest rates are providing important support to the Australian economy as it recovers from the effects of the pandemic. The Australian dollar exchange rate is around its lows of the past year or so. Housing prices have risen strongly, although the rate of increase has eased in some cities. With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers.

The decision to end purchases under the bond purchase program follows a review of the actions of other central banks, the functioning of Australia's bond market and the progress towards the goals of full employment and inflation consistent with target. Many other central banks have ended, or will soon end, their bond purchase programs. More importantly, faster-than-expected progress has been made towards the RBA's goals and further progress is likely. In these circumstances, the Board judged that now was the right time to end the bond purchase program. Since the start of the pandemic, the RBA's balance sheet has more than tripled to around $640 billion, with this expansion providing continuing support to the economy. The Board will consider the issue of the reinvestment of the proceeds of future bond maturities at its meeting in May.

The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target. Ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates. As the Board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target band. There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved. Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target. The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to:

• Maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent
• Continue to purchase government securities at the rate of $4 billion a week until at least mid February 2022
• Discontinue the target of 10 basis points for the April 2024 Australian Government bond.

The Australian economy is recovering after the interruption caused by the Delta outbreak. As vaccination rates increase even further and restrictions are eased, the economy is expected to bounce back relatively quickly. The central forecast is for GDP growth of 3 per cent over 2021 and 5½ per cent and 2½ per cent over the following two years. One important source of uncertainty continues to be the possibility of a further setback on the health front.

The Delta outbreak caused hours worked in Australia to fall sharply, but a bounce-back is now underway. The Bank's business liaison and the data on job ads suggest that many firms are now hiring, which will boost employment over coming months. The central forecast is for the unemployment rate to trend lower over the next couple of years, reaching 4¼ per cent at the end of 2022 and 4 per cent at the end of 2023.

Inflation has picked up, but in underlying terms is still low, at 2.1 per cent. The headline CPI inflation rate is 3 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions in global supply chains. A further, but only gradual, pick-up in underlying inflation is expected. The central forecast is for underlying inflation of around 2¼ per cent over 2021 and 2022 and 2½ per cent over 2023. Wages growth is expected to pick up gradually as the labour market tightens, with the Wage Price Index forecast to increase by 2½ per cent over 2022 and 3 per cent over 2023. The main uncertainties relate to the persistence of the current disruptions to global supply chains and the behaviour of wages at the lowest unemployment rate in decades.

Housing prices are continuing to rise in most markets and housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors. The Bank welcomes APRA's recent decision to increase the interest rate serviceability buffer on home loans. It is important that lending standards are maintained at a time of historically low interest rates.

Financial conditions in Australia remain highly accommodative, with most lending rates at record lows. Bond yields have increased recently and bond market volatility has also risen significantly. The exchange rate has appreciated a little, but remains within the range of the past year.

The decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target. Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished.

The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. While inflation has picked up, it remains low in underlying terms. Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia.

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time. The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth.

There can be no better example of a fair and just tax than Australia’s system of Franking Credits. 

Firstly, what are Franking Credits?

Also known as ‘Imputation Credits’, Franking Credits are the allowance made for Company Tax deducted before you receive your dividends on your company shares. 

A little like Pay As You Go (PAYG) tax on wages.

Bear in mind that virtually every adult in Australia is a shareholder, via their Super or Pension Fund, in most of Australia’s major companies.

As we know, personal Income Tax is paid at varying levels according to total taxable income, rising from Zero, to 45% at the top ‘marginal’ rate.

Other entities, such as Companies, SuperFunds and PensionFunds pay tax too, and at different levels.

The Company Tax deducted from your dividends is at the rate of 30%. This means that when you receive your ‘nett’ dividend, it is ‘after tax’. So, for example, if today you received your after tax dividend cheque for $700, then $300 tax would already have been paid on your behalf. Thus, your ‘gross’ (before tax) dividend would have been $1,000.

When it comes time to do your tax return, you show the nett $700 you received, plus the franking Credit of $300, together totalling $1,000. 

Your personal tax liability on your total income (including your dividend and franking credit) is then calculated. 

Then, depending on the top ‘marginal’ rate of tax (0-45%) applicable to your income,  this rate is applied to your dividend and to your franking credit.

For example, total taxable income (including dividend and franking credit) $95,000 (marginal tax rate 32.5%). Then your tax would be (32.5% x $1,000), that is $325.

However, because tax of $300 has already been paid, your liability is only $25. ($325 - $300)

But say your total income came to $18,000 (Zero marginal tax rate), then your liability would be Zero. Therefore the $300 tax ‘pre-paid’ would be fully refundable to you.

One of the major tax advantages of SuperFunds is that Income Tax of only 15% is payable on investment income. 

This means that your fund receives, on your behalf, a tax credit/refund of half the Franking Credit. Effectively a 21% increase to the rate of Income Return!

And - when you reach retirement and convert your Super to a PensionFund, your Pension enjoys a Zero tax liability, and will receive a full refund of the pre-paid tax (this makes a Pension Fund an unbeatable tax shelter). A 42% increase to the Income Return!

A current example of the value of franking credits is Commonwealth Bank (CBA), having recently declared 

its fully-franked dividend for the year of $3.50 per share. With its franking credit of $1.50 per share, this takes the total dividend to $5.00.

This would be a 5.8% return if you’d bought your shares six months’ ago. Or a 10.6% return if you’d bought 10 years’ ago. 

But that’s another story.

Figures current at 23/8/21

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to:

• Maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent
• Maintain the target of 10 basis points for the April 2024 Australian Government bond
• Continue to purchase government securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid November.

The economic recovery in Australia has been stronger than was earlier expected. The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter. The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly. Prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year. The economy is benefiting from significant additional policy support and the vaccination program will also assist with the recovery.

The economic outlook for the coming months is uncertain and depends upon the evolution of the health situation and the containment measures. Beyond that, the Bank's central scenario is for the economy to grow by a little over 4 per cent over 2022 and by around 2½ per cent over 2023. This scenario is based on a significant share of the population being vaccinated by the end of this year and a gradual opening up of the international border from the middle of 2022. The Board also considered a range of other scenarios, with the main source of uncertainty being the health situation.

The labour market has recovered faster than expected, with the unemployment rate declining further to 4.9 per cent in June. Job vacancies have remained at a high level and there are reports of labour shortages in parts of the economy. Some increase in the unemployment rate is expected in the near term due to the current lockdowns, but most of the adjustment in the labour market is likely to take place through a reduction in hours worked and in participation. In the central scenario, the unemployment rate continues to trend lower next year, to be around 4¼ per cent at the end of 2022 and 4 per cent at the end of 2023.

The CPI inflation rate spiked to 3.8 per cent for the year to the June quarter, largely reflecting the unwinding of some earlier COVID-19-related price declines. In underlying terms, inflation remains low, at around 1¾ per cent.

Looking forward, a pick-up in both wages growth and underlying inflation is expected, but this pick-up is likely to be only gradual. In the Bank's central scenario, it takes some years for the stronger economy to feed through into wage and price increases that are consistent with the inflation target. In underlying terms, inflation is expected to be 1¾ per cent over 2022 and 2¼ per cent over 2023. One source of uncertainty is the behaviour of wages and prices at the low levels of forecast unemployment, including because it is some decades since Australia has sustained an unemployment rate around 4 per cent.

Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors. Given the environment of rising housing prices and low interest rates, the Bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.

Domestic financial conditions remain very accommodative, sovereign bond yields have declined and the exchange rate has depreciated to around its lowest level this year, despite elevated levels of commodity prices. The recent fiscal responses by the Australian Government and the state and territory governments are also providing welcome support to the economy at a time of significant short-term disruption.

The Board remains committed to maintaining highly accommodative monetary conditions to support a return to full employment in Australia and inflation consistent with the target. Together, the low level of the cash rate, the bond purchase program, the yield target and the ongoing funding that has been provided under the Term Funding Facility are providing substantial support to the Australian economy in the face of lockdowns in parts of the country and the expected resumption of the economic expansion.

The Board will maintain its flexible approach to the rate of bond purchases. The program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.