The Reserve Bank of Australia's latest monthly policy meeting takes place today, with Governor Philip Lowe's decision statement (2:30PM AEST) expected to confirm an unchanged stance from the Board. During the time since the previous Board meeting, the state of play was best summarised by Governor Lowe during his speech to the AFR Business Summit on March 10. While the reopening was well advanced and activity indicators had come in stronger than expected; output was almost back to pre-covid levels and the recovery in employment had been v-shaped, the Australian economy remained "operating well short of full capacity" and there was uncertainty ahead with the Federal Government's JobKeeper wage subsidy withdrawn at the end of March.
More detail was provided around the Board's full employment and inflation objectives, which to be met would likely require the unemployment rate (currently 5.8%) to fall towards the "low 4s" and for wages growth (currently 1.4%Y/Y) to be running "sustainably above 3 per cent". The RBA is not expecting these conditions to be met "until 2024 at the earliest" and it has also made clear that the forecast rise in headline inflation to the 3% upper range by mid-year will be treated as transitory, reflecting pandemic-related volatility in prices. While optimism around the global economic recovery and strong activity data in Australia has led to financial markets speculating on prospects for an earlier tightening in policy, Governor Lowe explicitly pushed back against such expectations during his March 10 speech. Additionally, it was stated (and then repeated in the March meeting minutes) that the Board was neither considering removing the yield target nor changing the target from 0.1%.
All in all, expect today's decision to reiterate the RBA's commitment to keeping the 3-year segment of the yield curve anchored at the 0.1% target for the cash rate. The progress achieved in the recovery in the domestic economy and labour market has been encouraging, but crucially this is likely to continue to be viewed as a sign of vindication of existing monetary policy settings rather than arguing the case for an earlier tightening, especially when considering that the RBA's current forecasts (that extend to mid-2023) do not show either its full employment or inflation objectives being achieved. Commentary on the strength of conditions in the housing market will also generate plenty of attention ahead of Friday's Financial Stability Review, though for the time being this appears to be something that the RBA is monitoring more so than concerned about.
