January 25, 2021

AMW: A 2-year yield target as an exit strategy from the 3-year yield target?

This week we review the range of views within NAB’s research teams about the future of various conventional and unconventional monetary policy settings.

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Last week, NAB updated its views on Australian monetary policy settings (see  NAB Monetary Policy Update – January 2021). The key views were: the RBA is likely to end the TFF in June, reduce but continue QE when it decides to announce the future of its programme some time over the next few months, while the continuing fall in the unemployment rate is likely to pressure the RBA’s 3-year yield target by mid-year.

However, there was a considerable range of views within our team around this house forecast. We surveyed our team members on the following questions: 1) what economic and market conditions do we think will need to exist for the RBA to maintain QE at the current rate, taper QE or cease QE after the current program ends; ii) when do you expect the RBA to announce what it proposes to do with its QE program going forward – and why?; iii) what percentage chance do you give to the RBA announcing full rollover; a tapered program or the end of QE; iv) how do you expect the process of policy normalisation to occur in Australia? Which unconventional policy will be removed/adjusted first? Will tapering or removal of QE precede the phasing out of the 3-year yield target?

Week ahead – seven days of no local transmission, holiday tomorrow in Australia, Q4 CPI and December NAB Business Survey on Wednesday. RBA forecasts will need to be upgraded in next week’s SMP.

In excellent news, Australia has now recorded a whole week of zero local transmission, which should allow further easing of restrictions and quick reopening of interstate borders. This brings the RBA’s upside scenarios back into play. These favourable trends were evident in last week’s unemployment data, which continues to drop faster than even the RBA’s upside scenario. Next week’s SMP forecasts will require upgrades to the GDP and unemployment outlooks on the basis of historical outcomes, current virus control and as Australia begins to rollout the vaccine from mid-February, which is earlier than previously expected. The inflation forecast track presumably also requires some upgrade as well.

Tomorrow is a holiday in Australia. Wednesday has two major data releases – the NAB Business Survey for December and the Q4 CPI. We’re looking for an above-consensus headline CPI print (+0.9% q/q, versus market +0.7%) after a number of categories of the NZ CPI printed stronger than expected (cars and domestic holidays in particular). The core CPI is expected to remain low at +0.4% q/q (market +0.4%) as weak rents continue to drag on core inflation. Rents continue to be restrained by closed international borders – we’ll need to be alert for a significant bounce back in this component and core inflation when international borders re-open and immigration and international student flows can recommence.

Chart of the week: unemployment beating best scenario


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