PKF Wealth Investment Committee: RBA Announcement

What happened?

With Australian interest rates at an all-time low, due to Australia’s policy response to the COVID-19 crisis, this week saw one of the most anticipated Reserve Bank of Australia (RBA) monetary policy meetings in a while. We saw the RBA Board announce this week that they have decided to:

  • maintain the cash rate at 0.10%
  • continue to purchase government bonds (print money) at a rate of $4 billion a week until at least mid-February 2022.

Both of these were expected.

Image source: RBA

What changed?

There were two key changes by the Board that were announced from the meeting:

  • They are ceasing their yield curve control on the April 2024 government bond, a proxy for the bank’s forward guidance on cash rate
  • Removing previous reference to the first interest rate hike being “2024 at the earliest”.

Both big changes, but both also expected given what has played out over the last couple of weeks in bond markets.

The Bank’s economic outlook

The bank downgraded its economic growth forecast for 2021 from 4% to 3% but upgraded its 2022 forecast from 4.25% to 5.5%, effectively pushing the recovery out a year. They also tipped wages growth to hit 3% over 2023, which is key given the bank has previously indicated wages growth would need to be above 3% for inflation to sustainably be within the RBA’s 2-3% band.

Correspondingly, the RBA thinks unemployment will be at 4% at the end of 2023. Inflation has picked up at the headline level given higher petrol prices, prices for newly constructed homes, and disruptions in global supply chains, but the underlying inflation level is still low at 2.1%.

But they also noted that an important source of uncertainty continues to be the possibility of a further setback on the health front, persistence of the current disruptions to global supply chains, and the behaviour of wages at the lowest unemployment rate in decades (i.e.: does wages growth shoot up like it used to historically at very low levels of unemployment or not – e.g., technology gains).

They remained comfortable with broader financial conditions, bond and currency markets, and the housing market, whilst welcoming the banking regulator’s recent decision to increase the interest rate serviceability buffer on new home loans.

Rates outlook

The bank remains committed to maintaining highly supportive monetary conditions in order to meet their inflation target and return to full employment.

However, their comments show they’ve likely brought their expectations of a 1st rate rise from “2024 at the earliest” to sometime in the 2nd half of 2023. This will be a moving feast for both markets and the RBA, but it’s clear any decision will be data dependent whilst they continue to be patient.

Market reaction

Markets reacted as follows:

  • Bond yields down across the curve (ie. prices up) – market had previously got ahead of itself in pricing in rate rises for 2022 (which is unlikely)
  • AUD/USD – rose early in the session before falling away post the meeting
  • Aussie Equities – finished lower for the day but mounted somewhat of a recovery post meeting.

Our view

Nothing surprising in the announcement given what played out quite publicly over the last couple of weeks in the bond market. Higher inflation prints were always going to apply pressure to the RBA’s very easy, patient, and relaxed stance on rate rises. But we don’t think this drastically changes the path for rates going forward considering the significant levels of household debt that have been accumulated over the past 18 months and the slack that remains in the labour market.

The RBA will only raise rates after they have consistently met their policy objectives. Even then, they will be slow and measured, with the key question then being - what level of rates can the economy withstand – 0.75-1.25% or higher?

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