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Inflation Concerns Underpin Bear Steepening

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  • The Bank left its broad monetary policy settings unchanged, as expected, while updating its assessment of the domestic economy ahead of the official release of the SoMP on Friday. These updates, coupled with some tweaks to the wording deployed in the statement, provided a hawkish tinge.
  • The main point of note in the statement saw the Bank reveal that "at its July meeting, the Board will 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. The Board is not considering a change to the target of 10 basis points."
  • The Bank further increased the importance of its July meeting as it revealed that "at the July meeting, the Board will also consider future bond purchases following the completion of the second $100 billion of purchases under the government bond purchase program in September."
  • The announcements re: the decisions that will come in July caught most off guard, with the broader assumption being that the Bank would wait until August (when armed with a fresh SoMP and the release of Q2 CPI data) before making decisions on such matters. This will mean that the monthly labour market reports covering April and May will provide the key data inputs for these decisions. We also highlight that today's statement saw the Bank remove reference to 'considerable spare capacity' and suggestions that 'unemployment is still too high."
  • A tweak to the Bank's rhetoric surrounding its forward guidance was likely a product of the aforementioned updated projections surrounding inflation and unemployment and provides slightly less assurance re: monetary policy further down the line.

Please use the following link to access the full review:

RBA Review - May 2021.pdf