Daily Commentary BY THE CURVE TEAM –

RBA Minutes Illustrate Key Considerations

21st of July, 2021

Although there was little new information from the July meeting minutes, the RBA re-iterated their key considerations for policy in the current environment.

Firstly, the RBA referenced their optimistic view on lockdowns, which had only been a week in NSW at the time of the meeting. They said ‘spending was expected to rebound when containment measures were eased, supported by highly accommodative policy settings, the strengthened balance sheets of many households and firms, and an increase in the pace of vaccinations.’

Since the meeting, the outlook for lockdowns has deteriorated. Victoria and South Australia are currently dealing with outbreaks and NSW is likely to extend their lockdown in to next month. This has the potential to delay RBA tightening, especially of its QE, if the impacts on the economy are large enough.

They elaborated on their take on employment and wages, which re affirmed much of what Lowe said in his speech two weeks ago. Their central scenario is that wages will take time increase, despite the low unemployment rate and high vacancy rates, which is being largely influenced by a lack of overseas workers.

There was an allusion to potential macroprudential regulation being implemented, with the RBA saying members continued to emphasise the importance of monitoring trends in housing borrowing and ensuring that lending standards are maintained.’ Recent lockdowns may slow activity, which would delay the need for this, but the latest lending numbers show a pick-up in investor activity which is more likely to be viewed as unsustainable.

On the yield curve target on QE decisions, there were two key insights. First, that the decision to reduce QE purchases to $4 billion was clearly influenced by market expectations, with the RBA citing that the amount was ‘within the range of market expectations’.

This sets a precedent for future monetary policy, that the RBA will avoid surprising the market unless absolutely necessary. Rather than them dictating the market, the market is seemingly dictating to them.

Secondly, despite inflation and wages currently being nowhere near the RBA’s target levels, the improvement in economic outcomes and outlook was the key determinant of reducing the rate of purchases. So even with targets being about actual inflation and wage outcomes rather than forecasts, the outlook is still factored in.

The RBA would counter this by saying that the amount of purchases, not the rate is the predominant effect of QE. Therefore, while the actual inflation and wage targets are below target levels, they will keep QE in place, and only removing QE entirely would amount to a tightening of policy.

Josh Stewart

Associate - Money Markets