The RBA’s policy stance is likely to ease further in the years ahead, Westpac says.

And it’s imbalances in asset prices, rather than inflation, that will act as a catalyst to put the brakes on easy monetary policy.

The analysis from Westpac chief economist Bill Evans comes in advance of today’s monthly interest rate announcement from RBA governor Philip Lowe.

The central bank’s monthly update follows a speech from US Federal Reserve chair Jerome Powell which was the talk of markets last week.

Powell cited the long-term struggle (fought by central banks everywhere) to get inflation back within the target 2-3 per cent band.

Instead, as Stockhead’s Reuben Adams summarised last week, the Fed is happy to keep its extraordinary stimulus measures in place until the crippled economy has sufficiently recovered.

The ripple effect from that shift in communication has had an impact across asset classes — notably the Australian dollar, which has climbed back to two-year highs near US74c.

In light of that, today’s RBA announcement will be closely watched, for any subtle shifts in language around the bank’s policy outlook.


RBA to stay ‘aggressive’

For starters, Evans noted that domestic policymakers had faced a similar challenge to their US counterparts (and also failed), when it came to generating steady inflation growth.

And even billionaire investors such as Howard Marks have made a point of saying they don’t really know what underlying forces cause inflation to rise.

So now that the Fed has added a degree of flexibility to its view towards inflation, what will the RBA do next?

In terms of the outlook, Evans said the RBA had done a good job of keeping its options open by “providing fairly vague guidance with respect to future policy”.

For his part, Evans has also gone on the record to flag the prospect of negative interest rates heading into next year.

But so far, that idea has been refuted fairly strongly by other economists as well as the RBA itself.

Broadly speaking though, the current backdrop sets the stage for the RBA to maintain “aggressive policy stimulus” over the medium-term.

Over the next three years, the RBA’s guidance is “much more likely to change with a need to provide further stimulus, than any need to tighten policy”, Evans said.

In fact, it’s not a potential rise in inflation that will curtail such measures. Rather, growing imbalances in financial markets will be the wildcard that forces a change in policy.

“It is more than reasonable to expect that the policy constraint to ongoing aggressive stimulus will be asset markets rather than inflation,” Evans said.

In other words, a policy cycle defined by movements in asset prices, rather than a by-product of economic productivity.

For now, with the ASX steadily marching higher on the back of historic central bank (and government) support measures, markets will be watching closely for any signs of additional policy stimulus in the months and years ahead.