Fundamental Updates: A Rate Hike Before 2024? (04 November 2021)

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 NOV 4, 2021

The Reserve Bank of Australia (RBA) concluded its monetary policy meeting on Tuesday with no change in its weekly A$4 billion bond purchases, aka quantitative easing (QE), while holding interest rate unchanged at 0.10%. What has changed during this meeting is the ending of the central bank’s yield curve control (YCC).

Dropping the YCC

It all began when the RBA carried out an unscheduled purchase of A$1 billion of April 2024 Australian government bond back in 22 October in an attempt to tame the rising yield, bringing it back down to the central bank’s 0.10% target.

Towards the end of October, yield on the April 2024 bond sky-rocketed to 0.75%, the biggest monthly increase since 1994. This time round however, the RBA did not attempt to bring down the yield to its target through any purchase of bonds, leaving the market to speculate that the RBA may be discontinuing its YCC during its November meeting.

The decision to end the YCC “reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target” as explained in the rate statement. With the rise of interest rates from other markets, the central bank felt that the efficacy of the YCC has vanished.

An earlier rate hike timeline

The RBA has repeatedly emphasized that an interest rate hike will be considered only when inflation is sustainably achieved within its 2-3% target. Prior to the November’s meeting, the central bank forecasts that this condition “will not be met before 2024”. However, it has revised this forecast somewhat optimistically in yesterday’s statement, indicating that:

“The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth.”

With this revision, the RBA is now implying the possibility of inflation coming into the 2-3% targeted range at the end of 2023. This means it is fair game for the central bank to carry forward its rate hike timeline.

Overall positive economic projections

The RBA’s quarterly economic projections for 2022 and 2023 have underwent positive revisions. Specifically, inflation projection has been revised upwards which is good as it is the main deciding factor of a rate hike from the central bank. The RBA now expects inflation to fall within their 2-3% target for 2022 and 2023.

 2022 2023 GDP5.50% (a little over 4.00%)2.50% (2.50%)

Unemployment 4.25% (4.25%)4.00% (4.00%)

CPI 2.25% (1.75%)2.50% (2.25%)