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Reserve Bank of Australia to announce changes to QE and YCC policies

The Reserve Bank of Australia (RBA) will meet on Tuesday, July 6th at 2.30pm. Governor Lowe will hold a press conference at 4.00pm following the decision.

The economic data that matters:

GDP (YoY) Unemployment rate Wage growth (YoY) CPI (YoY)
1.1% 5.1% 1.5% 1.1%

Source: Trading Economics

What is the market expecting from this RBA meeting?

The RBA are tipped to announce key changes to their monetary policy settings at this month's meeting. The cash rate itself is all but certain to remain unchanged. However, in response to what's been a much stronger than expected economic rebound for the Australia economy, the central bank has flagged modifications to its quantitative easing (QE) policy and yield curve control (YCC) program. As it's done after other major policy changes since the pandemic, the RBA is scheduled to hold a press conference at 4.00pm following the release of the official decision to explain probable changes to policy.

What will changes to the QE and YCC policies actually entail?

The central issue for this RBA meeting is what changes the central bank will make to its QE and YCC program. The consensus view in the markets has become that the RBA will not extend the three-year yield target to the November 2024 bond, and that it will announce another round of quantitative easing worth $100 billion, but with greater flexibility to adjust its bond purchases to future changes in the economy. The purpose of the subsequent press conference is likely to explain to the public the reasoning behind the decision, and reassure that the cash rate is still expected to remain unchanged until 2024.

Will the RBA adopt a more hawkish stance towards future policy?

Given the RBA is in a very small and subtle way stepping away from its emergency policy settings, market participants will be watching for whether this meeting also brings with it a shift to a more hawkish tone from the central bank. With the Australian economy growing at a very strong rate, the RBA may use this meeting to begin discussing the path to more 'normalised' policy settings. In addition, given the recent weakness in the Australian Dollar, brought about in large part by the US Federal Reserve's recent hawkish pivot, the RBA may have greater scope to discuss tightening policy without risking a surging exchange rate.

What impact will the latest Covid-19 outbreak in Australia have on the economy?

The latest Covid-19 outbreak in Australia, and the subsequent lockdowns across the country, has introduced a new headwind for the economy. The two week Sydney lockdown alone, which could yet still be extended, is estimated to cost the Australian economy approximately $2 billion, and shave 0.1% off GDP growth for the quarter. Market participants will be attuned to what risks the pandemic continues to pose to the Australian economy according to the RBA, and whether it is likely to impact the central bank’s future policy considerations.

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How could the RBA meeting impact the AUD/USD?

The AUD/USD's post-pandemic uptrend has threatened to reverse recently, thanks largely to a resurgent US Dollar. The Greenback has appreciated in recent weeks, following last month's US Federal Reserve meeting, at which that central bank forecast two interest rate hikes by 2023. Even before that, the AUD/USD was trading well off its year-to-date highs, thanks to cooling iron ore prices and the RBA's efforts to weaken the currency via its QE program. In the bigger picture, the AUD/USD remains in a broad uptrend, and has respected the boundaries of its consolidation pattern. A break below ~0.7450 would negate this view, and could open up greater downside for the pair. While a reversion too and then beyond the 50-day and 100-day moving averages might signal a continuation of the uptrend.

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