Yield Target Dropped, Looser Cash Rate Guidance Adopted

The RBA dropped its yield curve targeting measure as expected, noting that "the decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target. Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished." This is the RBA's way of saying the target has served its purpose.

• The forward guidance re: the cash rate is a little more ambiguous than the Bank's previous offering, noting that "the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time. The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2.5 per cent at the end of 2023 and for only a gradual increase in wages growth." The reference to '24 as a likely staging post for a hike in the cash rate is gone (implicitly suggesting an earlier lift off point) and the Bank's underlying inflation forecasts now sit above the 2.0% lower bound of its target range across the forecast horizon, but it continues to point to the need for wage growth when it comes to facilitating sustained underlying inflation. This has led to the Bank adopting more of an ambiguous tone when it comes to its guidance re: the cash rate, even as it marks its inflation forecasts higher, perhaps a case of not wanting to be too penned in by explicit guidance on this front. We will assess market repricing when it comes to IB's at today's settlement. RBA Governor Lowe will speak in just over an hour, after an impromptu webinar was announced.