RBA: Hawkish in Deed, Dovish in Word
They kept rates unchanged at 0.10 bps and asset purchases at the same rate of $4 bln per week. This was expected. Furthermore, they finished their yield target of 0.10 bps for the April 2024 Australian Government bond. Arguably this was expected too as they had stopped defending the yield prior to the meeting.
The RBA tipped their hat to rising inflation pressures. This was conceded by the fact that they abandoned the April 2024 bond yield target as they recognised the systemic risk of fighting the market’s drive to push short end yields higher.
However, the RBA stated that the market had ‘overreacted’ to recent inflation data and that they consider inflation has remained low in underlying terms at 2.1%. The headline inflation of 3% was being driven higher by petrol, homes, and supply chain issues.
The inflation forecasts
- * Underlying inflation to 2.25% over 2021/2022
- * Underlying inflation to 2.50% in 2023
The uncertainty to the RBA’s projections was all around ‘how persistent’ the current disruptions to global supply chains would be and what happens to wages. You see, the RBA are playing the same game of ‘ how transitory is transitory’. They are uncertain.
The RBA board require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is where the RBA want to see the inflation being driven from. The RBA see that is ‘likely to take some time’.
Expect the market to be very sensitive to wage growth data. If we see signs of faster than expected wage growth expect this to boost the AUD. Also, remember that Australia’s largest export is Iron Ore and its prices have been falling sharply recently. This is a drag on the AUD, but a snap higher in Iron Ore prices will be supportive for the AUD. Always worth remembering.