Daily Commentary BY THE CURVE TEAM –

YCC Focus of RBA Minutes

17th of March, 2021

Much of the commentary around the RBA meeting minutes was whether the RBA would maintain the three-year yield curve target later in the year.

Currently, the April 2024 bond target is 0.10%. Market consensus is that the target will not be moved to a later bond and instead will remain for the April bond until its maturity.

The reference point for the decision will likely be the RBA’s current forecasts for inflation and unemployment. Headline inflation is expected to be 3% in the June quarter and employment to decline by 0.3% for the first 6 months of this year.

If both inflation and employment undershoot it will be harder for the RBA to justify not extending the target. If it overshoots, there will be a strong case that the economy is tracking better than expected so can remove yield curve control.

Should the economy track as expected, it is harder to say what the RBA will do. Bill Evans of Westpac believes that the likelihood that the economy will perform better than expected is low, but more importantly that their credibility will be a priority.

Succumbing to market moves and ending QE and YCC earlier than expected would go against their forward guidance of the last 12 months. According to Evans, only if bond yields begin implying inflation rates above the target band will the RBA be inclined to respond to markets by unwinding their bond purchases.

Also released yesterday were payrolls for the two weeks until 27 February. They lifted 0.4%, leaving them 0.4% higher than last year. This bodes well for the labour force numbers being released tomorrow.

Josh Stewart

Associate - Money Markets