Daily Commentary BY THE CURVE TEAM –

Minutes Confirm Subtle Shift

19th of May, 2021

The May board meeting minutes from the RBA confirmed a subtle shift from the policy decision announcement.

In the May meeting, the RBA shifted to saying an increase in the cash rate is ‘unlikely to be until 2024 at the earliest’ from saying they do ‘not expect these conditions to be met until 2024 at the earliest’. This was interpreted by many analysts as the RBA opening the door to earlier than expected tightening.

Accompanying this shift was an emphasis on ‘the flow of economic data and conditions in financial markets in Australia’ as dictating the policy direction. This follows Deputy Governor Debelle’s speech which similarly emphasised real economic outcomes as determining policies.

It suggests the RBA are not locked into a cash rate of 0.10% until 2024 and that the Yield Curve Target and QE decision in July will be based on economic activity. Nonetheless, their central scenario is that they will not be required to move the cash rate earlier than 2024.

What the RBA will decide on the Yield Curve Target and QE is less certain. Even the RBA’s updated forecasts sees slack in inflation and unemployment through to 2023, so to tighten policy before these have recovered may be unpalatable.

However, markets are already pricing in a removal of the three-year yield target and cash rate increases prior to 2024. This follows other countries, notably New Zealand, Canada and the US, who have priced in cash rate rises prior to 2024.

Wage data for Q1 is released today, which is a key factor in determining the RBA’s policy. The RBA expect wages to remain subdued right through to 2023, which is expected to keep inflation low and therefore see no increase in the cash rate before 2024.

Josh Stewart

Associate - Money Markets