MNI STATE OF PLAY: Eyes on July as RBA Leaves Policy Unchanged

The Reserve Bank of Australia confirmed Tuesday that key decisions on forward guidance and the scale of the the longer-dated bond buying programme will be taken at the July meeting, with stronger growth forecasts but a subdued medium-term inflation outlook muddying the water for policymakers.

The June meeting saw the RBA leave all major policy settings unchanged, with the key interest rate remaining at a record low 0.10%, the same level level being targeted on the 3-year government bond and the size of the asset-purchase programme still at AUD200 billion.

With the decision pushed back to July, policymakers have another month to evaluate the strength of the economic recovery before deciding on their next move.

The RBA will then decide if it will extend its yield target from three-year Government bonds maturing in April 2024 to the November 2024 series -- effectively extending the duration of current forward guidance. The bank said Tuesday it is "not considering" changing the target from 0.10%, a further indication that no changes in interest rates are being considered.

The RBA will also consider future bond purchases under the AUD200 billion program to buy longer dated bonds which is due for completion in September, with no indications offered whether there will be an extension in size or not.

SOLID RECOVERY

The RBA's priorities remain a return to full employment and rising wages which will drive inflation into its target range of between 2% and 3%. While the momentum is encouraging, both of these metrics are some distance away from RBA targets with the bank continuing to say that the conditions for any rate rise are "unlikely to be until 2024 at the earliest."

April unemployment came down 10 basis points to 5.5%, but the figure was based on a lower participation rate and employment actually declined by 30,000 jobs. Full employment is a "high priority" for the RBA, and while it has not published an employment target it is believed to be between 4% and 4.5%.

While anticipating a pick up in inflation from the current 1.1% in the second half of this year due to the "reversal of some COVID-19 price reductions", the RBA is forecasting inflation at 2% until by June 2023.

Given these time frames for inflation reaching goal, the RBA says it is committed to "maintaining highly supportive monetary conditions".