The recalibration of the RBA's monetary policy settings announced today were broadly as markets had anticipated, though the decision to signal the start of tapering in early September was at the more hawkish end of forecasts for the July meeting. As noted in the preview, the key theme the RBA has been keen to put forward of late is the transition taking place in the economy from recovery to expansion and this has had implications for policy. To summarise today's announcements, the maturity for the yield target was retained at the April 2024 bond, while QE purchases will reduce in pace from the current weekly run rate of $5bn to $4bn once the second $100bn tranche of purchases is completed in early September. The target for the benchmark interest rate and 3-year AGS yield was unchanged at 0.1%. Overall, the main takeaway continues to be that the Board assesses the economic outlook as being unlikely to prompt rates hikes before 2024 due to subdued inflation and wage dynamics.
Today's decision statement from Governor Philip Lowe outlined that while the rebound in the Australian economy from the pandemic crisis has been stronger than expected and future prospects remain positive, the recovery was still in need of significant monetary stimulus with the latest setbacks from outbreaks and lockdowns a reminder of the risks still present. The net result of this assessment was that the Board elected not to extend the yield target to the November 2024 bond, keeping the focus of the policy at the April 2024 line. This prompted a slight tweak in forward guidance, though the message largely remains the same with rate hikes not anticipated "before 2024" compared with "until 2024 at the earliest" previously. Governor Lowe expanded on this timing in a special post-meeting press conference, noting that while employment and GDP had seen strong recoveries from the depths of last year, the nominal side of the economy, namely in inflation and wages growth, had lagged in this upswing. Prior to the pandemic, inflation in Australia had been below the RBA's 2-3% target for several years and wages growth had been on a downward trend. Powerful structural headwinds are seen to have contributed to this, and while these still persist, the RBA believes the key to breaking this cycle is a tight labour market to drive wages growth above 3%. But this is expected to be a drawn-out process and this is reflected in the Board's 2024 guidance. Despite yields at the 3-year segment sitting above the 0.1% target, there was no sign that the RBA is readying to step back into the market here but it "remains prepared" to do so and the case to respond could build if the global shift higher in front-end rates is sustained.
On its QE program, the RBA signaled today that in early September the pace of purchases will taper as it shifts to a more flexible set of parameters than currently in place. With the flow of economic data to be key to determining the run rate, the signal to reduce purchases from $5bn per week to $4bn was justified in the decision statement as reflecting the strength of the recovery and positive outlook. Understandably, Governor Lowe was keen to emphasise that the taper did not constitute a withdrawal of support. While a more flexible approach to bond-buying was widely expected, the taper signal did come as a surprise (I had expected purchases to stay at $5bn per week) given the non-extension to the yield target and the recent expiry of the Term Funding Facility. This also comes ahead of the US Federal Reserve outlining its plans for tapering. Nonetheless, it is a modest tapering plan, with the technical details showing that Commonwealth Government purchases (Mondays and Thursdays) are to ease from $2bn to $1.6bn, while semis purchases (Wednesdays) slow to $0.8bn from $1bn. This still retains the existing 80/20 split by which purchases have been accumulated to date. The RBA has committed to this course from early September until the November meeting when the pace of purchases will next come under review, which implies a tranche of a little more than $42bn. However, purchases will almost certainly be extended beyond this timeline, with Governor Lowe outlining that bond-buys will continue "until there is further material progress towards the goals for full employment and inflation".
