MNI STATE OF PLAY: RBA Playing Waiting Game on Economy

The Reserve Bank of Australia is set to take a wait-and-see stance when policymakers meet Tuesday, as they look for clearer signals a sustainable recovery is underway before taking a first step in normalising monetary policy.

No change is expected to interest rates, yield targets or the total size bank's bond buying program, with the underwhelming Q1 inflation data published last week pushing back any likelihood of an announcement this month on amending forward guidance

Inflation and a tighter labour market driving wages higher are the key criteria for the RBA to contemplate any change in policy measures, and Q1 inflation data -- which came in at an annualised 1.1% -- was well below forecasts and far short of the RBA's target range of 2-3%.

Although unemployment fell from 5.8% to 5.6% in March, the end of the Government's AUD70billion JobKeeper program is expected to slow and even retard employment growth in coming months.

The RBA has said that a full employment level sufficient to drive wages growth and inflation would be in the vicinity of 4.5%, with the official data still along way shy of that level.

RECOVERY UNDERWAY

With an -- albeit slow -- vaccination program underway and international borders with New Zealand re-opening, Australia's economic recovery is undoubtedly underway but is at an early stage and insufficient for the RBA to change its dovish tone.

At the same time, the central bank elected not to extend its yield control program to Government bonds maturing in November 2024 at its last meeting, opting instead to wait and judge the strength of the recovery before extending its guidance period in how long rates will remain at the current low levels.

The RBA has said it does not expect to raise rates from the current record low of 0.10% until 2024 "at the earliest", with its current yield curve program targets bonds maturing in April 2024.

After hinting at an early decision on the yield control program to send a signal to the markets, the RBA is now buying time and officials have recently said a decision can be made in July or August.

All of which suggests that the central bank is likely to maintain its current policy settings next week as it waits to see how the economic recovery progresses in coming months, and particularly after a May 11 Federal Budget which the Government is now saying will include fresh spending to stimulate jobs growth.