Overview

• NAB re-confirms its monetary policy call of the RBA moderately tapering its QE program, penciling in a further $75bn program (over six months) once the current $100bn tranche of buying ends in September. We also expect the RBA will not roll forward its YCC target of 0.1% to the Nov-24 bond, limiting purchases to the April-24 bond.
• Following the release of yesterday’s GDP numbers and ahead of the looming RBA announcement on its unconventional policy measures at the July meeting we have firmed up our views on policy. As foreshadowed over the last month, we expect the RBA will moderately taper its QE program by announcing a further $75bn program (over six months) once the current $100bn tranche of buying ends in September.
• As we have for some time, we continue to expect that the RBA will not roll forward the YCC target of 0.1% to the Nov-24 bond. The better than expected recovery to date means that the RBA cannot credibly commit to unchanged interest rates for the next three years on a rolling basis. Rather the bank will prefer a shift to conditional forward guidance.
• Indeed, the bank has emphasised the path of the cash rate – it’s most important policy tool – will be based on actual economic outcomes and will not be lifted until full employment has been achieved and inflation is sustainably at target. The latter requires an acceleration in wages growth to above 3%. The RBA and NAB do not see these conditions occurring until 2024, though the risks are now more balanced than previously.
• Both economic activity and the labour market have rebounded much more quickly than expected with both employment and GDP now above pre-COVID levels. With forward indicators pointing to ongoing strength in the near-term – absenting the effects of the renewed and hopefully short-lived Melbourne lockdown – it appears that the economy is entering a new phase of growth. That said, unemployment remains a little above pre-pandemic levels, and is notably above the level consistent with full employment.
• Therefore, a degree of spare capacity will persist for some time and see underlying wage growth and inflation remain soft – though it is likely that we will see a transitory boost to both wages and inflation in the near term due to continuing pandemic-induced dislocations including border closures and some labour shortages.

For further details, please see the NAB Monetary Policy Update June 2021