RBA on hold
The Reserve Bank of Australia has taken a decisive step to try and drive unemployment very low. The current rate is 5.5% and the RBA would like to see this drift down towards the 4% level. This emphasis on a return to full employment was once again seen in the latest RBA minutes. Here are the headlines:
- No rate hikes until actual inflation is within 2-3% rage and supportive monetary conditions (low rates etc) to be maintained in order to support a return to full employment and for inflation to be consistent with this target
- The labour market is not expected to be tight enough to spur higher age growth (and therefore inflation with it) until 2024.
- Significant outbreaks of COVID-19 virus remain, but as more people get vaccinated this risk should fade.
- Still sees inflation in underlying terms remaining low and underneath the central bank targets.
- Economic recovery is stronger than earlier expected and is forecast to continue. The Bank's central scenario is for GDP growth by 4.75% and 3.5% over 2022.
- Progress in reducing unemployment has been falser than expected with unemployment expected to drop to around 5% by the end of this year.
The takeaway
I have written before on this bearish outlook from the RBA trying to drive unemployment back down to 4%. This remains the case and should keep the RBA on hold even while other central banks start raising rates. So, one of the key economic points to look at going forward is the unemployment rate. Fast progress here and this is what will move the RBA's dial. Say, we got a surprise jump down to below 5% then that should bring forward the RBA interest rate projections and a trade would be to to buy the AUD a few days or even just the day before the next rate meeting. This also maintains a AUDNZD sell bias as long as the RBA and the RBNZ central banks diverge. However, watch out for the bond yield curve between the AU10Y and the NZ10Y. See chart below.
Full statement from the RBA.
