MNI STATE OF PLAY: Inflation Tests RBA Dovishness On Rates

The Reserve Bank of Australia meets on Tuesday amid expectations it will issue fresh interest rate guidance after inflation moved into its target range almost two years earlier than forecast.

The RBA has been steadfast in maintaining that it was unlikely to raise official rates from the record low of 0.10% until 2024, when it believed inflation would be "sustainably" within its 2% to 3% target range, see: MNI INSIGHT: RBA Likely To Stick With Rate Path After CPI Surge.

The bank was persisting in this view and was defending the 0.10% yield target on April 2024 government bonds, up until last week when its preferred measure of inflation showed a surprise 2.1% annualised increase after jumping in the third quarter.

The RBA's last Statement on Monetary Policy, released in August, forecast inflation would not reach 2% until August 2023.

After the inflation data was released last week Deputy Governor Guy Debelle said that "a little bit more inflation was welcome."

WAGES STILL THE KEY

The RBA has consistently said that it was unlikely to change its outlook until inflation was sustainably in the mid-range of its target and wage growth picked up.

Wage growth is still flat, at 1.7% for the second quarter with third quarter data to be released on Nov. 17.

The central bank's outlook has been at odds with the market, with RBA Governor Philip Lowe criticising market expectations in several speeches in recent months.

Last week's inflation data, and the fact that the bank did not defend the 0.10% yield target, will be a major test of the RBA's dovish stance. With key areas of the country now out of lockdowns, the strength of an expected economic rebound into the southern hemisphere summer will also come into play.

While there are no expectations of an interest rate rise on Tuesday, the RBA could make an announcement on the yield target for the April 2024 government bonds, and on its wider bond buying program which is set to continue at the rate of AUD4 billion a week until mid-February.

If the RBA persists with its dovish rhetoric that could have the welcome effect of cooling the rise of the AUD, which appreciated from USD72 cents to USD75 cents in October.

More on the RBA's outlook will also be revealed on Friday, with the publication of the latest Statement on Monetary Policy.