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RBA Keeps Policy Intact but Signals Amendments in July

The RBA left all monetary policy measures unchanged in May and reiterated that a rate hike would “unlikely to be until 2024 at the earliest”. However, the central bank upgraded economic projections and signaled that some amendments would be made on yield curve control (YCC) and QE in July.

Economic Assessments

The RBA acknowledged the strong economic developments since the last meeting. As noted in the accompanying statement, “recovery in Australia has been stronger than expected and is forecast to continue”. The staff also upgraded economic projections. GDP growth is projected to improved to +4.75% y/y this year (previous: +3.5%) and then to +3.5% over 2022 (unchanged). The unemployment rate will likely drop to 5% by end-2021 (previous: 6%) and then to 4.5% by end-2022 (previous: 5.5%).

Yet, the members remained concerned about the inflation outlook. As noted in the statement, the recent CPI data “confirmed that inflation pressures remain subdued in most parts of the Australian economy”. Looking through the “temporary spike” in 2Q21, the central bank only revised higher the inflation forecasts slightly. Inflation is projected to reach +1.5% by end-2021 (previous: +1.25%) and +2% by mid-2023 (previous: +1.75%). As anticipated, the members acknowledged the rise in home price in “all major markets”, thanks to strong demand from owner-occupiers and “especially” first-home buyers. They pledged to monitor trends in housing borrowing “carefully”.

Monetary Policy Outlook

The central bank left all monetary policy measures unchanged but signaled that some tweaks would be made in July. On the YCC program, the RBA indicated that it would “consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond” while it “is not considering a change to the target of 10 basis points”. Concerning QE, the members would “consider future bond purchases following the completion of the second AUD100B of purchases under the government bond purchase program in September”. They are also prepared to increase purchases so as “to assist with progress” towards the goals of full employment and inflation. In the previous meeting, the central bank suggested that it would increase buying “if doing so would assist with progress”. The statement this month also added that “the Board places a high priority on a return to full employment”. We expect the central bank to extend its QE purchases, by +AUD100B, to a total of AUD300B in July. Concerning the TFF, the RBA noted “the date for final drawings under the Term Funding Facility is 30 June 2021. Given that financial markets in Australia are operating well, the Board is not considering a further extension of this facility”.

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