As expected the RBA holds the line on current policy settings and guidance. Any response to the housing boom will depend on lending standards; smoothing of bond markets, if necessary, will continue while forecasts and guidance remain consistent with current policy settings in 2021.
As we expected the Reserve Bank Board maintained the policy settings which it had adopted at the February meeting and reaffirmed the conclusion:
“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest”.
Markets were most interested in whether the Governor would signal changes to the Quantitative Easing (QE) or Yield Curve Control (YCC) policies.
Westpac assessed the increase in on market bond purchases as being aimed at smoothing disruptions in the market rather than signalling a blanket increase in QE. The Governor confirmed that view with, “bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market. The Bank is prepared to make further adjustments to its purchases in response to market conditions.”
That line appears to indicate a timing adjustment of the $100 billion program rather than any blanket increase in QE. The smoothing approach was taken last March before a set volume of purchases was determined on November 3 and will be applied in future. Going forward, if necessary, a separate allocation to deal with disruptions remains possible.
Markets were also looking for some guidance around YCC. The Governor stated clearly that “the Bank remains committed to the 3-year target and recently purchased bonds to support the target and will continue to do so as necessary”.
As we have indicated, any decision to extend the maturity of the target to November 2024 from April 2024 bonds will be a function of the Bank’s forecasts of the timing of the achievement the inflation and wages objectives, (reiterated as 2024 at the earliest).
That decision is likely to be deferred until the August Statement on Monetary Policy, although with the Bank already owning up to 60% of the existing April 2024 bond, an earlier decision may be necessary. As discussed in a note last week our current assessment of the Bank’s forecasts would be consistent with an extension of YCC to the November bond although market pricing is violently opposed to that view.
Despite significant movements in market rates the Bank has not responded to the information content of those moves to revise its forecasts. The Governor specifically reiterates the inflation forecast of 1.5% over 2022; along with the GDP and unemployment forecasts from the February Statement on Monetary Policy.
On housing the emphasis is on housing credit growth where it is repeated from the February Statement that, “investor and business credit growth remain weak”. But the warning that “Lending standards remain sound and it is important that they remain so”, is an addition and really summarises the Board’s approach to the current housing boom.
Clearly macro prudential policies are appropriate for dealing with lending standards rather than interest rates.
It was necessary for the Governor to comment on recent financial market volatility. In attributing the increases in bond rates to partly reflect a lift in inflationary expectations more in line with central banks’ targets there was certainly no sign of concern with those developments.
There was also acceptance of the level of the Australian dollar – “in the upper range of recent years”.
Conclusion
This Statement emphasises the Board’s steady hand. There is no sign of any significant review to current policy settings as a result of recent market developments.
Bond purchases will, if necessary, continue to be used to deal with market disruption; achievement of inflation and wages targets is still expected to be timed for 2024 “at the earliest” and YCC is confirmed as policy.
The key is not market pricing but economic developments and how the Bank’s forecasts respond to those developments.
At this stage, Westpac’s forecasts are consistent with the Board seeing the need to maintain these policies through 2021 (including an extension of QE in October) but we recognise that we are in particularly volatile times as the world economy emerges from the pandemic.
