RBA Says Economy, Markets Key to July Call on Bond Programs

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(Bloomberg) — The Reserve Bank of Australia said it would pay “close attention” to economic data and conditions in financial markets when deciding whether to roll over its yield-target maturity and undertake further quantitative easing.

The RBA is due to make a call at its July 6 meeting on whether to move the three-year yield target to the November 2024 bond from the current April 2024 security. The outcome could provide an insight into when the first interest-rate rise will occur. The central bank will also announce any plans for more longer-dated bond buying, with the current A$100 billion ($80 billion) tranche expiring in September.

“The board remained willing to undertake further bond purchases if doing so would assist with progress towards the bank’s goals of full employment and inflation,” it said in the May meeting minutes released Tuesday. “Future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia.”

The RBA is aiming to push unemployment down toward 4% as it tries to spark wages growth and return inflation to the 2-3% target. Australia’s economy has recovered much faster than expected and the jobless rate is currently at 5.6%, having fallen almost 2 percentage points from mid-last year.

The bank is uncertain how prices will respond during the recovery, given they had been muted for a prolonged period, while at the same time the world economy is rapidly rebounding.

“The increase in commodity and other input prices was expected to contribute to higher inflation globally in subsequent months, and members noted that inflation expectations in advanced economies had also increased to be closer to central banks’ targets,” the RBA said.

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The bank has sought to give itself more policy flexibility by focusing on stronger wages to fuel consumer-price growth. It cited a focus on cost control by business and public sector policies on pay gains as potential headwinds.

The Australian dollar remained near its high for the day after the minutes were released, up 0.3% at 77.88 U.S. cents. Yields on 10-year bonds eased slightly, to be up 4 basis points at 1.79%. Yields on the April and November 2024 bonds were at 0.1% and 0.31%, respectively.

The RBA in its minutes reiterated that wages growth would need to be “sustainably above 3%, which was well above its current level.”

The RBA’s key rate is currently at 0.10%, the same level as its three-year yield target, which acts as a form of forward guidance. The bank reiterated in the minutes that it’s “unlikely” the conditions for higher borrowing costs will be achieved until 2024 at the earliest. The board also agreed that the July meeting wouldn’t need to consider a change to the 10 basis-point target.

At the same time, the central bank noted that yields on other three-year instruments “had increased since the start of 2021 and were consistent with market participants expecting the cash rate to begin increasing from its current level during 2023.”

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