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Chief economist update: RBA promises support over the next three years

"Come on, Barbie, let's go party" ... until 2024.

In Reserve Bank of Australia (RBA) parlance: "The board is committed to maintaining highly supportive monetary conditions until its goals are achieved. The board will not increase the cash rate until actual inflation is sustainably within the 2-3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest."

This is RBA governor Philip Lowe's promise to us, Australians all, at the conclusion of the central bank's board meeting on April 6 when it decided to keep current policy settings unchanged - official cash rate at 0.1%; 3-year government bond yield target at 0.1%; and "the parameters of the Term Funding Facility and the government bond purchase program".

For sure and for certain, the RBA's declaration that "The economic recovery in Australia is well under way and is stronger than had been expected" and "is expected to continue, with above-trend growth this year and next" is affirmed by recent indicators - employment and consumer and business confidence, among others - and upgrades to the domestic economy's growth outlook by international agencies.

The IMF's 'World Economic Outlook April 2021' report (released overnight) upgraded Australia's GDP growth to 4.5% this year from 3.5% forecast in January 2021 and 3.0% predicted in October 2020. This is in line with the OECD's 'Economic Outlook' March 2020 quarter interim report that upgraded Australia's 2021 GDP growth forecast by 1.3 percentage points to 4.5%.

But like most other world central banks, the RBA cannot afford to rest on its laurels because "there are still considerable uncertainties regarding the outlook" and "Inflation remains low and below central bank targets".

"...wage and price pressures are subdued and are expected to remain so for some years. The economy is operating with considerable spare capacity and unemployment is still too high. It will take some time to reduce this spare capacity and for the labour market to be tight enough to generate wage increases that are consistent with achieving the inflation target. In the short term, CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions. Looking through this, underlying inflation is expected to remain below 2 per cent over the next few years."

But when?

Historical data shows that even when the unemployment rate dropped to multi-decade lows of around 4.9% back in 2011, wages growth remained subdued and measured inflation rose only to the mid-point of the RBAs 2%-3% target band before resuming its downward trend that, in turn, prompted the RBA to cut the official cash rate in succession from 4.75% in late 2011 to 1.5% in 2016.

If the IMF's latest projections are correct, Australia's CPI inflation wouldn't reach the mid-point of the RBA's 2%-3% target until 2026 when it's forecast to increase by 2.4%.

Then again, 2024 and 2026 are light years away. There's so much that could go right or wrong between now and then.

In the meantime, "come on, Barbie, let's go party!" while the sun shines.

Read our full COVID-19 news coverage and analysis here.

Read more: Philip LoweReserve Bank of Australia