Too much rather than too little remains the least risky pathway for the RBA


Steve Miller

There were no real surprises in RBA Governor Lowe’s Statement issued following the latest RBA Board meeting.

While continuing to acknowledge a more positive outlook insofar as growth and employment are concerned, the absence of any evidence of significant price or wage inflation saw the Governor again stress that the  RBA will  continue with the  application of historically high levels of monetary accommodation: the ‘pedal to the metal’.

The RBA strongly reaffirmed the commitments made in February, including:

  • the 3 year bond target of 0.1%
  • a commitment to ongoing QE and
  • reiterating the RBA Board’s expectation of no increase in the cash rate before 2024.

(A decision  on when or if the 3 year bond target will roll to the November 2024 bond will be made later in the year.)

In so doing the RBA, like most of the global central banking fraternity, is unconcerned by market expectations of inflation rebounding. While markets are anticipating a rebound in inflation, it is from an extraordinarily low base and to a level that central banks would likely welcome. In that context the current market-based measures of inflation expectations and what the world’s central banks, including the RBA, are seeking to achieve on inflation are entirely reconcilable. In that context too, central banks are not yet overly concerned by the recent rise in global government bond yields.

Of course, the dynamics would change if some of the prognostications of ‘too much’ stimulus – promulgated by the likes of Obama era Treasury Secretary Larry Summers – come to pass.

In reaffirming the maintenance of historically accommodating monetary policy settings,  the RBA was motivated to avoid an unwelcome movement in the AUD, even if it comes as some relief to the RBA that the AUD is closer to 0.75USD than the 0.80USD of late February. Any move up in the AUD could well frustrate the task of getting unemployment down and wage growth and inflation up. To this end the Governor reaffirmed the message from previous meetings that the RBA 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.”

While the economy’s performance has certainly exceeded expectations, and recent wage growth surprised modestly on the upside, it still remains at levels that are uncomfortably low for the RBA and its inflation objective.

The unemployment rate, again while having bettered expectations, is still some way north of the “4 point something” cited by the Governor as getting close to capacity.

On that basis, and with an eye firmly on the AUD, the RBA has decided that erring on the side of ‘too much’ rather than ‘too little’ is at this stage remains the least risky pathway for monetary policy.

By Steve Miller, GSFM investment strategist

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