MNI INSIGHT: RBA Set For Mid-Year Rate Guidance Call

The Reserve Bank of Australia should decide by July whether to extend its yield targeting further into 2024, a decision which would effectively deliver fresh forward guidance on interest rates, MNI understands.

The central bank current targets a yield of 0.1% on the 3-year government bond maturing in April 2024, coinciding with the RBA's current forward guidance to maintain the historic low official interest rate until early that year.

Policymakers must now determine whether to switch their target to a November 2024 bond. A decision is expected by the August policy meeting, but MNI understands the RBA is likely to make an earlier call.

INFLATION

The RBA's current forward guidance is based on inflation returning to the target 2-3% range by early 2024, delivering wages growth. But, while this view is in line with bond market expectations, officials are still unconvinced, and could opt to extend their yield target if they decide a return to target within this timeframe has become less likely, MNI understands.

Previously, early signs of inflation may have been met with tighter policy, but now, with rates at the effective lower bound and inflation still low, the RBA is inclined to keep easier policy settings at full throttle until the economy reaches cruising altitude and inflation returns to target.

While the economy has recovered faster than the Bank initially expected, it is still trying to determine when this cruising altitude will be achieved.

House prices, one outlet for inflationary pressures, rose sharply in February, up 2% on one measure as the property market responded to record low lending rates, but the RBA remains relatively unconcerned, MNI understands. Any initial response to a frothy housing market, if needed, would come from the Australian Prudential Regulation Authority and not the central bank.