MNI STATE OF PLAY: RBA Still Dovish Despite Yield Target Pass

The Reserve Bank of Australia opted against extending the duration of yield targeting, leaving rates and guidance little changed Tuesday, but saying that while it will slow weekly purchases of government bonds it could add to stimulus if the need arose.

In their most anticipated decision, policymakers maintained the April 2024 government bond as the focus for control of bond yields, passing on the opportunity to extend the target – and de facto guidance – a few months further along the curve.

Leaving both the benchmark cash rate and the target yield for the 04/24 bond unchanged at 0.1%, the RBA trimmed the rate of weekly bond purchases to AUD4 billion per week from AUD5 billion per week, with the policy to be reviewed in November, when total government bond purchases will be just over 30% of total issuance.

Despite not extending the target period and trimming QE, Governor Philip Lowe emphasised that the central bank's outlook remains dovish and that the economy still needs ongoing monetary support and further downside risks could emerge.

SHORT ON GOALS

Although the economy had "bounced back earlier and stronger than expected", Lowe said it remained "well short" of goals of full employment and inflation.

The November review "strikes the right balance," said Lowe, and did not lock the bank into "any particular path." Purchases could be scaled up if economic conditions -- such as a resurgence of the pandemic and more lockdowns -- warrant them.

With the bank "committed" to a yield target of 10 bps, in step with official rates, the implication is that the RBA does not see a rate rise until April 2024, although it denies that this amounts to forward guidance. Speaking after the decision, Lowe said he saw no likelihood of any increase in interest rates "until 2024." This was a slight change to the bank's recent language that rates were not likely to rise until 2024 "at the earliest."

ROADMAP

Lowe also set out factors that would drive the bank to consider raising rates: wages growth exceeding 3% and inflation sustainably within the 2% to 3% target range. First-quarter wages growth came in at 1.5% while inflation is at 1.1%. The unemployment rate is currently at 5.1%, while the RBA remains committed to full employment, which it sees in the "low 4%" range.

Inflation, however, was the key focus, and wages are important because they would drive inflation.

"This focus on wages does not mean we have a target for wages growth," Lowe said, "the condition for a lift in the cash rate relates to inflation, not wages."