Goldman: RBA Likely To Retain Optionality Amid Virus Headwinds

Goldman Sachs note that "while economic data have generally been firm, virus news has been more downbeat as delta variant outbreaks have been accompanied by renewed lockdowns and mask mandates in some major cities and vaccine roll-out has remained much slower relative to G10 peers. We think the combination of recent virus developments and still soft wage/inflation dynamics may give the bank some space to retain flexibility and convey an "on hold" message with respect to guidance on its YCC program and the cash rate. On QE, our economists expect the RBA to signal a more open-ended QE extension of A$5bn/week in purchases that can be flexibly adjusted based on how conditions evolve. On YCC, we expect the RBA will keep the April-24 bond target as the fixed end-point. While our economists see risk of an early exit from YCC (with a 40% risk of a hike before end 2024), this is likely a more medium-term risk that likely needs near-term uncertainty to subside and the labour market to tighten at a sufficiently rapid pace. At present the market has priced a fairly sizable probability that the RBA doesn't follow-through with its current guidance, with OIS forwards already pricing in 38bp of hikes by the end of next year. On balance, while we see medium-term risks as tilted towards an earlier removal of accommodation, we think more immediate risks are skewed towards the RBA striking a fairly dovish tone in light of current headwinds."