In a busy week on the Australian economic calendar, the RBA Board's monthly policy meeting comes up today. It is expected that Governor Philip Lowe's decision statement will confirm no changes in monetary policy settings at 2:30PM (AEDT). The recent sharp rise in global bond yields has been met aggressively by the RBA. Last week, the RBA raised its bond purchases to $12bn, its most since the early phase of the pandemic, as it underscored its commitment to keeping 3-year Australian Government bonds trading around the 0.1% level it targets on the cash rate. And yesterday, $4bn of purchases were made under the bond purchase program, which is twice the usual daily pace for purchases of Australian Government bonds. Recall that at the February meeting, the Board announced a $100bn expansion of the bond purchase program.
The $12bn of purchases made by the RBA last week included $7bn directed towards defending the 0.1% yield target on 3-year bonds (the first purchases of this type since last December and most since April) and the usual weekly amount of $5bn of longer-dated bonds under the bond purchase program. The lift in bond-buying together with further commitment in today's statement from Governor Lowe to its forward guidance that the economic conditions to justify an increase in the cash rate are not expected to be reached "until 2024 at the earliest" may be used to lean against the view that has gathered a lot of support that the 3-year yield target may be in line for an adjustment in the upcoming months; a move which appears unlikely. The results of yesterday's bond auction show that around $1.1bn of the November 2024 bond was purchased. Currently, the RBA's yield target policy focuses on the April 2024 bond, but yesterday's auction could be a sign of things to come through a shift to the November 2024 bond when a decision on this comes from the Board.
While the economic recovery has run ahead of the RBA's earlier expectations and tomorrow's national accounts are likely to show that the momentum was sustained over the final months of 2020, GDP will remain down on pre-pandemic levels and vastly below where it was forecast to be if the pandemic had not occurred. This has clear implications for the labour market and wages growth, two key areas for the RBA. Last week's Wage Price Index showed annual wages growth holding around record lows of 1.4% after a seemingly temporary boost in the December quarter. The actions of other central banks have also been emphasised as key in shaping RBA policy. With no signs that policy accommodation will be reeled in anytime soon, earlier tightening from the RBA would risk upward pressure on both the currency and bond yields and slowing the recovery in the domestic economy.