The Reserve Bank is not for turning
Reserve Bank Board meeting

What happened? The Reserve Bank (RBA) left the target rates for both the cash rate and 3-year government bond yield (April 2024 maturity) at 0.1 per cent. The RBA will continue to purchase government securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid-November.

Implications: Accommodative policy settings remain supportive of the uptrend in equities.

What has changed since the last Board meeting on July 6?

• Greater Sydney, South Australia, Victoria and south-east Queensland are, or have been, in virus lockdowns.

• The Consumer Price (CPI) Index rose by 0.8 per cent in the June quarter, lifting annual growth from 1.1 per cent to 3.8 per cent. The ‘underlying’ CPI or trimmed mean rose by 0.5 per cent in the quarter (1.6 per cent annual).

• Employment rose by 29,100 in June. The jobless rate fell from 5.1 per cent to a 10½-year low of 4.9 per cent.

• Job ads, as measured by ANZ, fell 0.5 per cent from 12½-year highs in July.

• Retail spending fell by 1.8 per cent in June to stand 2.9 per cent higher than a year ago.

• The NAB business confidence index fell from 20.0 points to 10.7 points in June. And the conditions index fell from a record high 35.8 points in May to 24.1 points in June (long-term averages near 5.7 points).

• The Westpac-Melbourne Institute Index of Consumer Sentiment rose by 1.5 per cent in July to 108.8 points.

• The CoreLogic national home value index lifted 1.6 per cent in July to be up 16.1 per cent on the year.

• Council approvals to build new homes fell by 6.7 per cent in June but were still up 48.9 per cent on a year ago.

• Private sector credit rose 0.9 per cent in June (the most in 15 years) to be up 3.1 per cent on the year.

• The value of new loan commitments for housing fell by 1.6 per cent to be up 82.7 per cent on a year ago.

• In July in the US, the US Dow Jones rose by 1.3 per cent; the S&P 500 rose by 2.3 per cent; and the Nasdaq lifted 1.2 per cent. In Australia the ASX 200 rose by 1.1 per cent – the tenth straight monthly gain.

• The Aussie dollar has broadly held between US73-76 cents, and is near US74 cents currently – up by over a third of a cent today – a negative for exporters.

The assessment

• “The Board will maintain its flexible approach to the rate of bond purchases. The program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target. The Board 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.”
Perspectives on interest rates
• The RBA left the cash rate at 0.1 per cent for the seventh meeting after cutting the rate from 0.25 per cent on November 3, 2020. The RBA previously cut the cash rate on March 3 and March 19, 2020, each by 25 basis points. The target rate for 3-year bond yields was left at 0.1 per cent. On November 3, the RBA cut the 3-year bond target from 0.25 per cent to 0.1 per cent. The RBA implemented the 0.25 per cent target rate for 3-year bond yields on March 19, 2020.
Implications

• The Reserve Bank made its decision to slow its bond purchases (‘taper’) last month in the full knowledge that the Covid-19 situation could change. And it knows the situation can change again before September. The bottom-line is that the RBA is not about to chop and change on policy or its longer-term views. And that should give investors’ confidence.

• The RBA will provide a full deck of economic forecasts on Friday. But early indications suggest that there haven’t been major changes. The Reserve Bank continues to play the long game, believing the economy will bounce back from current lockdowns and that vaccination rates will lift over time to allow ‘normalcy’ to return.

• The economy is expected to grow “by a little over 4 per cent over 2022” and the jobless rate is tipped to fall to around 4¼ per cent at the end of 2022. Both forecasts are arguably more positive than three months ago.

Published by Craig James, Chief Economist, CommSec