The RBA is about to have ‘quite an important meeting’ — here’s what to watch for
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Today’s interest rates announcement from the RBA could prove to be “quite an important meeting”, Westpac says.
ASX investors are about to get a number of key updates on monetary policy, with a busy RBA schedule this week to kick off the new month.
Today’s meeting will be followed by a speech on Thursday from the bank’s deputy governor Guy Debelle called “Monetary Policy during Covid”, before the release of its quarterly Statement on Monetary Policy (SoMP) on Friday.
And Westpac chief economist Bill Evans noted that ahead of the previous two SoMPs (in February and November), the RBA announced key changes at its monthly policy meeting.
For now, the bank is likely to stay committed to its stance that rates won’t climb until 2024 at the earliest.
But markets are on the lookout for updates on two other important policies;
1. the bond purchasing (quantitative easing – QE) program, and
2. the yield curve control (YCC) program, which caps yields on three-year bonds at 0.1pc.
Evans thinks the bank is more likely to wait until August for an update on both of those policies.
However, “the one most likely to be brought forward to May would be the extension of YCC”, he said.
Currently, the YCC program only applies to government bonds with a maturity of April 2024.
Ultimately, Westpac thinks the RBA will maintain and extend that commitment to bonds that mature in November 2024.
The key question is whether it commits to that extension this afternoon.
If it does, that’s may be considered as a more dovish stance than the market expected.
Like most RBA watchers, Westpac also thinks more QE is coming.
The central bank is currently buying around $5bn of bonds per week as part of its second $100bn QE program, which will tap out in September.
By August, Westpac reckons the RBA will flag another $100bn (its third such tranche).
Commonwealth Bank has a more dovish forecast; it too expects an August extension, but to the tune of only $50bn.
In addition, CBA thinks the RBA will keep its YCC program pegged to April 2024, rather than extending it to November 24.
So there are some differing views in the market about what the RBA will do next, and any surprises from the central bank could affect stocks and the Aussie dollar.
As for the RBA’s big stick — interest rates — Westpac said it seems “highly unlikely” the RBA will change its view on ‘2024 at the earliest’ any time soon.
The jobs market has rebounded strongly, and the unemployment rate is back below below six per cent.
But Evans suspects the RBA now needs to see an unemployment rate of 4% or less, before it views the economy as operating at capacity.
Just as importantly, central banks globally — led by the US Fed — have stressed the importance of patience in winding back stimulus.
Should the RBA divert from the pack, it would create more problems than it solves.
“A more hawkish tone would be counterproductive and risk unwelcome upward pressure on the Australian dollar,” Evans said.
So in summary, stock investors can expect the RBA to stay dovish. The only area of debate is how dovish it chooses to get.