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RBA Retains Key Rate Near Zero

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Australia's central bank maintained its key interest rate near zero and pledged to avoid a rate hike for at least three years in order to support employment growth and to bring inflation back to the target range.

The policy board of the Reserve Bank of Australia headed by the governor Philip Lowe decided on Tuesday to leave its cash rate unchanged at a record low of 0.10 percent.

The central bank retained the target yield on the 3-year Australian Government bond at around 0.1 percent, asset purchases of A$100 billion and also the parameters of the Term Funding Facility.

In November, the bank had reduced its cash rate by 15 basis points and lowered the target yield on government bonds and agreed to buy A$100 government bonds.

The RBA today said it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range, the bank said. 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 labor market. Given the outlook, the board is not expecting to increase the cash rate for at least three years.

The board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The board said it is prepared to do more if necessary.

Regarding economic outlook, the bank said the recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support.

In the RBA's central scenario, GDP is likely to reach its pre-pandemic level by the end of 2021. According to central scenario, the economy will grow around 5 percent next year and 4 percent over 2022.

The announcement came ahead of the release of quarterly national accounts on Wednesday. GDP is expected to grow 2.5 percent sequentially in the third quarter, reversing a 7 percent fall in the second quarter.

The central bank forecast the unemployment rate to fall slowly next year and to remain around 6 percent at the end of 2022.

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