RBA bows down to the market pressure
Well, it's not like they had a choice now did they? Let's recap.
RBA drops yield target
In the statement, the central bank cited this:
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.
Let's just cut to the chase here. They lost control of things last week and that was apparent enough that they weren't going to be continuing this already.
Sure, they are still going to stick with QE until at least mid-February 2022 (this one may get lost in the shuffle) but dropping the yields target is obviously the key standout.
And the reason being that inflation is likely to ramp higher and heap more pressure on the central bank to take action, even if they have not quite accepted that they will have to just yet - at least based on the forward guidance.
RBA getting nervous on inflation
Their latest projection reveals that they see inflation of around 2.25% over 2021 and 2022, and 2.50% over 2023. While highlighting that:
The main uncertainties relate to the persistence of the current disruptions to global supply chains and the behaviour of wages at the lowest unemployment rate in decades.
While wages are still likely to be more subdued overall and not hit the RBA's desired level, global supply chain disruptions are likely to still lend a hand in elevating consumer prices over time - which will pressure the RBA further next year.
For now, they are biding their time and easing the market into the narrative with their 2023 forecast being for inflation to hit 2.5%. But if these projections get revised higher, expect that to translate to a different forward guidance by the RBA moving forward.
RBA forward guidance change
Or at least what is perceived to be change in the forward guidance. Let's dissect the difference between the October and November passages. Here is the former:
The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.
And this is the one in November (bolding the key changes):
The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. While inflation has picked up, it remains low in underlying terms. Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia.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 2½ per cent at the end of 2023 and for only a gradual increase in wages growth.
To put things short, the RBA signaled that they are more open for a rate hike before 2024 but they may be willing to wait until the end of 2023 for that to take place.
Realistically, that may not be the case but their current "central forecast/scenario" dictates that they should be more patient in the approach as "it likely will take some time" for conditions to line up with how the RBA wants them to be.
However, with rising inflation pressures brought about by supply and capacity constraints globally, their constant denial that inflation is still "low in underlying terms" may eventually be dropped as they bow to the pressure and hike some time next year.
For now, their dovish lean has managed to pin down the aussie a little on the day but make no mistake that there has been a shift in tone as the RBA starts to open the door to tightening on rates as the year starts to come to an end.
