RBA holds the line as economy rages outside

A pedestrian walks past the Reserve Bank of Australia building in Sydney. AAP Inamge

A faster than expected recovery in the economy hasn’t changed the Reserve Bank’s thinking on the need to keep interest rates near zero until “2024 at the earliest”, but has fuelled market speculation of reduced policy support.

In the minutes of its April 6 board meeting, released on Wednesday, the RBA noted that the economy probably regained its pre-pandemic level in the March quarter after a much faster than expected rebound in employment, even as household consumption slowed after a strong rise.

“Overall, preliminary data suggested that GDP in the March quarter was likely to have recovered further to around its pre-pandemic level, earlier than previously expected,” the minutes said.

Combined with the central bank’s reinstatement in the minutes of its discussion of the money market’s timing of the next rate move (a 50-basis-point rise in the cash rate by the end of 2023), the official acknowledgment of faster-than-expected economic recovery from the COVID-19 pandemic pushed the dollar up ­almost half a US cent to a four-week high of US78.16c.

The dollar jumped as the 10-year bond yield rose almost seven basis points to 1.782 per cent.

“There was a little bit of ammunition in the minutes for the monetary hawks in that the minutes resumed discussing market pricing for a rate hike and assessed the impact on the bond supply of the bank’s QE program,” Westpac chief economist Bill Evans says.

“As expected, the commentary on monetary policy is largely unchanged. However, of most importance is that the discussion of the market’s timing of the next rate move has been reinstated.

“Of course, this observation stands in contrast with the assessment that the board does not expect these conditions necessary for a rate hike to be met until 2024 at the earliest.”

Evans adds that, while the RBA’s decision to discuss any other scenario for the timing of rate increases than the constant theme of “2024 at the earliest” is “worthy of noting”, it will only ­become relevant to the debate if “2024 at the earliest” is mod­erated.

Moreover, “the overriding themes that have driven the policy debate remain firmly in place”.

Still, the sharemarket ended a five-day winning streak, with the S&P/ASX 200 index falling 0.7 per cent to a three-day low of 7017.8 points as the RBA minutes contributed to a rise in bond yields.

Importantly, the board meeting for which the RBA minutes were produced predated last week’s release of March labour force data, which showed the unemployment rate unexpectedly dived to a 12-month low of 5.6 per cent as employment continued to surge.

The jobs data has led Commonwealth Bank’s head of Australian economics, Gareth Aird, to say it is time to start talking about economic “expansion” rather than “recovery”.

The current market thinking — magnified by the minutes — is that the RBA will be less inclined to quash speculation of a tapering of its bond buying and an earlier start of rate rises while everything is going right, except the vaccine rollout and international border reopening. But the RBA’s commitment to highly stimulatory policy settings hasn’t wavered.

While a negative policy rate is still viewed as “extraordinarily unlikely”, the board will not increase the cash rate until actual inflation is sustainably within the 2-3 per cent target range, and for this to occur wages growth would need to be “materially higher than it is currently”, the minutes said.

Importantly though, the minutes noted that the initial increase in the unemployment rate and its subsequent decline after the pandemic was “much sharper” than observed during the economic downturns of the 1980s and 1990s.

This is expected to “limit the longer-term scarring effects” — or hysteresis — that had hampered the recovery in labour market conditions following those downturns.

And with forward-looking ­indicators of labour demand remaining strong as the government’s JobKeeper wages subsidy ended last month, the RBA’s thinking is that “at least some of the job losses that were likely to follow the end of the JobKeeper program would be offset by new hiring”.

Thus while the full effect of the end of the JobKeeper program could take “several months” to become apparent and the overall recovery in the labour market was expected to pause in the period ahead, this was expected to be “only temporary”.

Royal Bank of Canada chief economist Su-lin Ong says the “outdated” RBA minutes need to be read in the context of the ­recent suite of stellar labour market data, and were “largely about marking time before the RBA’s next batch of economic forecasts in its May Statement on Monetary Policy, which will be delivered on May 7 — four days before the federal budget — and will probably include higher economic growth and lower unemployment rate forecasts.

“Nevertheless, despite the declining slack, we remain a long way from full employment and sustained within target inflation which suggests that ongoing ­accommodation is still needed ­especially if the global central banking policy stance errs easy,” Ong says.