At the May meeting in Sydney today, the RBA Board left all of its monetary policy settings unchanged. The decision statement from Governor Philip Lowe reaffirmed the 0.1% targets on the cash rate and 3-year Australian government bond yield while also maintaining existing parameters on the bond purchase program and Term Funding Facility (TFF). However, on the latter, Governor Lowe confirmed that the Board is not considering extending the TFF beyond its June 30 deadline; a move widely expected by markets.
The key development from today's statement is that despite the RBA's economic outlook being upwardly revised, the governor has retained the existing forward guidance stating that the conditions required for a rate rise are still not anticipated to materialise "until 2024 at the earliest". On the economic outlook, the governor outlined that the GDP growth forecast for 2021 has been revised to 4.75% from 3.5% previously, though there was no change made to the 2022 forecast of 3.5%. As highlighted in our preview, the revised profile for the unemployment rate was of most importance, and in the event was perhaps more optimistic than expected. Unemployment, currently at 5.6%, is now forecast to end 2021 at "around 5 per cent", which is a full 1 percentage point lower than was expected back in February. Then, by the end of 2022, unemployment is seen at 4.5% compared to 5.5% previously. Regarding inflation, underlying CPI has been revised up, but the progress is described as "gradual and modest" with 2021's forecast lifted to 1.5% from 1.25% before taking until mid-2023 to reach the lower target of 2% (was previously 1.75%). Again, it was reiterated that the near-term spike in inflation expected in the June quarter will be treated as transitory, reflecting the unwinding of pandemic-related price declines.
Overall, this more optimistic outlook for the Australian economy conveys confidence in the durability of the momentum that has built up through the recovery to date. This is noteworthy given the sense of caution that has tinged the Bank's commentary of late regarding the withdrawal of fiscal measures supporting the labour market. But while the downside risks appear to have dissipated, the economy is still projected to remain adrift from meeting the RBA's full employment and inflation objectives for some time. On the policy front, today's statement outlined that it will be at the July meeting where a decision will be made on whether the maturity of the 3-year yield target is maintained at the April 2024 bond or extended out to the November 2024 bond. Also, there will be an announcement on the future of the bond purchase program, with the second $100bn tranche of bond-buys on track to be completed by late August.
Despite Governor Lowe outlining an upwardly revised assessment of the RBA's economic outlook ahead of Friday's more detailed Statement on Monetary Policy, the overall conclusion is that progress is expected to remain insufficient to meet its objectives sooner than the 2024 timeline in its forward guidance. My expectation, therefore, remains that come the July meeting, the maturity of the 3-year yield target will be extended to the November 2024 bond, while a third $100bn tranche of QE purchases is also likely.
