Today's meeting by the RBA Board is the start of an important week for watchers of Australia's central bank. On Thursday night (7:00PM AEST), Deputy Governor Guy Debelle is scheduled to deliver a speech titled 'Monetary Policy During Covid', and the following day (11:30AM AEST) the Bank will publish its quarterly Statement on Monetary Policy containing its latest economic forecasts.
The key question is whether this week's events will lead to any shift in the Board's thinking on its policy settings. In short, I do not expect this to be the case. Today's decision statement from Governor Philip Lowe (2:30PM AEST) is likely to again reaffirm the Board's commitment to its forward guidance for rates not to rise "until 2024 at the earliest" as well as leaving all other policy settings unchanged. There could, however, be an announcement made on the maturity of the 3-year yield target policy, while it could also be confirmed that the Term Funding Facility will not be extended past its June 30 deadline.
Looking ahead to Friday's Statement on Monetary Policy, of most importance will be the revised outlook for the unemployment rate. In February's Statement, the RBA's forecast was for the unemployment rate to end 2021 at 6% before falling a further 0.5ppt in 2022 to 5.5% and then ease to 5.25% by mid-2023. But a strong start to the year has seen national unemployment fall 1ppt over Q1 to 5.6% as of March. Accordingly, 2021's forecast for unemployment will be revised down, though a conservative approach might be taken given the uncertainty associated with the end of the JobKeeper program, possibly ending the year around 5.25%. For 2022, unemployment could be forecast to fall to 4.75%, maintaining the 0.5ppt rate of reduction expected previously. Allowing for some further improvement over the first half of 2023, unemployment may be forecast to end the period at 4.5%.
Ahead of the upcoming Federal Budget, Treasurer Frydenberg indicated last week that the fiscal authority is aligned with the RBA in wanting to leave policy support in place until unemployment is in the 4s range. But the RBA has said it also wants to see "materially higher" wages growth (above 3%) and inflation "sustainably" within its 2-3% target band before it lifts rates. Last week's downside surprise on Q1 inflation shows there is a long way to go here. As such, while the encouraging progress in the recovery will likely be highlighted this week, I do not expect it to result in a shift in the RBA's tone on policy. With the updated forecasts to imply spare capacity persisting in the economy over the next couple of years, I continue to expect the RBA will announce an extension in its yield target policy on 3-year AGS from the April 2024 bond to the November 2024 bond, with a possibility of this occurring at today's meeting.
