The Reserve Bank of Australia Board kept its monetary policy settings unchanged at today's meeting. Much of the focus of the meeting was around the RBA's recent activity in the bond market after the sharp steeping in global yields of late. Recently, the RBA stepped up purchases in support of its 0.1% yield target for 3-year Australian Government bonds, and yesterday it purchased longer-term bonds at twice the usual daily pace under its quantitive easing (QE) program.
The decision statement from Governor Philip Lowe outlined that the RBA remains committed to its yield target policy and would make further purchases "as necessary" to hold 3-year yields around the 0.1% level of the cash rate. Also, the Governor noted that yesterday's higher than usual QE purchases ($4bn instead of $2bn) were made to "assist with the smooth functioning of the market". This was done by a bringing-forward of purchases and does not appear to point to move to a faster pace of purchases, though the Governor has put markets on notice through the line that the RBA was "prepared to make further adjustments to its purchases in response to market conditions". Commenting more generally on the sell-off in bond markets, Governor Lowe partly attributed rising bond yields to higher inflation expectations, though that had led to elevated volatility in other corners of the markets, including on the exchange rate with the domestic currency "in the upper end of the range of recent years".
The rates market continues to factor in an adjustment to the yield target policy later on this year with the target sliding up from 0.1%. However, given the RBA's recent actions in the bond market together with Governor Lowe reiterating the forward guidance that the conditions required to justify an increase in the cash rate (inflation sustainably within the 2-3% range underpinned by a tight labour market with a materially higher pace of wages growth) were not expected to occur "until 2024 at the earliest" suggests to me that will not be the likely outcome at this stage. Furthermore, the transmission of the RBA's current policy settings was seen as working through keeping financing costs very low, a lower currency than otherwise, ensuring an ample supply of credit and boosting balance sheets. A move to tighter policy would remove some of this accommodation and slow the economic recovery.
Other points of interest in Governor Lowe's statement were around the housing market with the emphasis being on lending standards remaining sound with house prices rising at a time of low interest rates. On inflation, while a pick-up in the pace is expected, this would be occurring on the reversal of pandemic-related price effects and would be viewed as temporary.
