Although not as optimistic as the big four and an array of local economists, the Reserve Bank of Australia has signalled the beginning of the end of emergency monetary policy settings by discontinuing the target for the yield on the April 2024 bond.
Relaying the thought process behind the introduction of the yield target in March 2020, RBA Governor Philip Lowe said during an impromptu press conference on Tuesday that its effectiveness as a monetary policy tool declined as the balance of probabilities shifted.
“It is now also plausible that a lift in the cash rate could be appropriate in 2023,” Mr Lowe said.
Acknowledging that inflation is “a little higher” than it has been over recent years, the governor revealed the central bank now expects underlying inflation of 2.25 per cent in 2022 and 2.50 per cent in 2023.
Last month, underlying inflation edged into the RBA’s target for the first time since 2015, to hit 2.1 per cent.
And while Mr Lowe did acknowledge the plausibility that global shock could be transmitted to Australia leading to faster-than-expected progress, he underlined that the RBA was not expecting a surge in inflation in the coming months.
Instead, he stressed the board’s preparedness to exercise patience, noting that the labour market would need to tighten to ensure “materially higher” wages before the bank would consider increasing the cash rate.
“Given the information we currently have to hand, it is still entirely possible that the cash rate will remain at its current level until 2024. But it is also possible that an earlier move will be appropriate,” Mr Lowe said.
“For inflation to be sustainably in the target range, wages growth will have to be materially higher than it is now. This is likely to take time. The board is prepared to be patient,” he continued.
RBA opts for vagueness
While the RBA did drop its no-rate-cut-before-2024 guidance, it now appears to have developed a relatively vague approach, noting the conditions for a hike, including a tighter labour market and materially higher wages, are “likely to take time”.
According to AMP’s Shane Oliver, while the central bank is slightly more upbeat than it has been for some time, having finally accepted the possibility of an earlier than previously predicted rate hike, it also appears relatively dovish.
“While the RBA has become more upbeat on the growth and inflation outlook and its forward guidance suggests an earlier than previously flagged start to rate hikes, it remains relatively dovish and patient with its central forecast implying that the conditions for a rate hike may not be in place until the end of 2023,” Mr Oliver deduced.
Calls for a review
Commenting on the RBA’s decision, Fidelity International’s cross-asset investment specialist, Anthony Doyle, drew attention to something others appeared to disregard –Tuesday’s relatively muted market reaction.
“The lack of any intervention to defend the 0.10 per cent target following higher than expected inflation numbers meant that the end of yield curve control had been largely anticipated by the market,” said Mr Doyle.
“Bond yields and the Australian dollar moved marginally immediately following the RBA statement,” he continued.
Drifting away from the intricacies of Tuesday’s rate decision, Mr Doyle appeared to back the much-anticipated RBA review.
“Calls for a review of the Reserve Bank’s performance and mandate, which has been advocated by the OECD, will likely continue to grow as it appears the decision to call an end to what was a key element of the RBA’s monetary policy support package was actually made before today’s monetary policy meeting of the Reserve Bank Board.”
Critics have, of late, accused the RBA of acting like a forecaster, with some questioning its competence and ability to steer the economy particularly during turbulent times.
In September, the international think tank Organisation for Economic Co-operation and Development (OECD) called for a review into the RBA, noting its failure to meet key economic targets in recent years.
