What You Should Know About the Stages of Grief – RBA monetary policy preview edition

The Reserve Bank of Australia policy board meets today, Tuesday 02 November 2021.

  • Statement due at 0330 GMT
  • Later, at 0550 GMT Deputy Governor Debelle is speaking (will be a panel participant at the Impact X Summit in Sydney on technological solutions for climate issues … which does not sound like he will be commenting on the policy decision made earlier).

Last week the RBA abandoned its Yield Curve Control policy. It had been targeting the Australian Commonwealth Government Bond (April 2024) at a yield of 0.1%. It attempted early in the week to buy the bond to drive the yield down toward the target. It failed to do so. Later in the week, following the Q3 inflation data, the Bank gave up, it didn’t attempt to buy the bond and the yield shot about 0.5%. Five times its target level.

ICYMI:   

This has led to speculation that today the Bank will also abandon its forward guidance that “

  • The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

That 2024 date was always fanciful. Even this guy didn’t believe it: 

Leaving aside the hubris of making such a forecast three years out given the RBA’s appalling record on forecasting, making such a firm commitment leaves the Bank open to criticism of not being able to adapt to changing circumstances should they arise. A central bank, any policymaker really, should of course leave the door open to adapting to change. 

So, for today’s meeting. Last week we had Q3 inflation, showing the CPI (core inflation as measured by the trimmed mean, and weighted average also) rising into the RBA target band. While the RBA has binned its YCC (from a purely practical viewpoint the Bank was in no position to enforce its 0.1% April ACGB 2024 target anyway, it would have had to buy all of the bonds out there, and there aren’t that many to have been a meaningful purchase in terms of policy) I am going to suggest it is way too early for the Bank to fully abandon the rest of its forward guidance. 

The Bank has told us, repeatedly, it wants to see wage growth (to drive inflation). There is wages data due from Australia on November 17. With any luck it’ll show acceleration in wage growth and this will give the Bank some cover to further adjust forward guidance. 

The five stages of grief are:

  • denial
  • anger
  • bargaining
  • depression
  • acceptance 

I suspect the RBA will be somewhere between the first two. One CPI report is not going to be enough to tip the RBA into acceptance. Its likely the 2024 date will be dropped, or at least the emphasis be taken off that calendar year, but the Bank will not (IMO) be endorsing market pricing of rate hikes as soon as 2022. Not at this meeting. To the extent that 2022 rate hikes are ‘priced in’ to the AUD this leaves it vulnerable to a pullback after the meeting.

The Reserve Bank of Australia policy board meets today, Tuesday 02 November 2021.

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