RBA preview: Four questions ahead of this month’s meeting

The RBA is expected to keep the cash rate on hold, but will it end yield curve control as inflation pressures mount?

When is the RBA meeting next?

The RBA will meet on Tuesday, November the 1st at 2.30PM.

Will the RBA end its’s YCC control program?

The core question at this RBA meeting is whether it will announce the effective end of its yield curve control program. The policy has been an important part of the central bank’s post-pandemic toolkit, acting to reinforce forward guidance and keep short-term market rates low. Yields at the front end of the curve have rocketed in recent weeks however, as market participants price in greater inflation pressures and a faster pace of interest rate hikes in the future. The yield on the three-year government bond has rocketed in recent months from around 0.2%, to over 1.2% currently, with the move accelerating after the RBA opted not to increase its purchases of its target April 2024 bond last week to push back against the rise. The decision not to act has been interpreted as a signal the RBA will retire the policy this week, in a move that will mark another step forward in policy normalisation.

Will the RBA stick to its current forward guidance?

Given the expectation that the RBA ought to conclude YCC, the logical next question of the central bank will be what it does with forward guidance. The cash rate will certainly not change at this meeting. But with the crucial anchoring of the three-year yield dispensed with, it opens up a possible revision of the RBA’s guidance that it does not see the conditions met to raise the cash rate until 2024. Amid building inflation pressures globally, that’s seeing central bankers raise, or move close to raising, interest rates, the rates curve in Australia has steepened considerably, too. Interest rate traders are pricing in a rate hike in May right now, with a total of four being baked into the market for the year 2022. This is up markedly from a month ago, where only one was being priced in over the next 18-months.

What is the RBA’s current view on inflation and growth?

Whether the RBA makes the expected hawkish pivot on policy or not relies on whether it changes its present outlook on growth and inflation. According to the most recent CPI release, annualised inflation eased somewhat in the last quarter from 3.8% to 3.0%, although trimmed mean inflation did jump to 2.1%. This remains above the RBA’s most recent forecasts in its Statement on Monetary Policy, which forecast inflation to ease back to 2.5% by the end of the year, on a headline basis. This is in line with implied measures of inflation in the markets, which suggests inflation will sit well within the RBA’s 2-3% target band for the foreseeable future. A change in the RBA’s guidance on growth and inflation would go some way to vindicating the markets view of a faster hiking cycle; some push-back on inflation risks could see those bets unwound.

How could the RBA meeting impact the AUD/USD?

The AUD/USD continues to hover near four-month highs above the 0.7500 handle ahead of this month’s RBA meeting, as robust commodity prices, bullish sentiment in global markets, a yield in premium in Australian bonds of US Treasuries, and unwind of short-positioning in the pair fuel its rise. Coming into the RBA meeting, it could be suggested the risk is skewed to the downside for the AUD/USD, given so much hawkishness is being implied in the interest rate market right, with the pair likely to drop if the RBA sticks to its dovish guidance. From a technical standpoint, the AUD/USD’s uptrend has broken down now, as price momentum slows, with the pair battling to push above the key 200-day MA. The key level on the upside for the AUD/USD remains around the recent highs at 0.7550. While on the downside, support at 0.7480 is the key level on the dailies to watch.

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