Via the excellent George Tharenou at UBS:
RBA Lowe changes CPI target to actual (not forecast) inflation
RBA Governor Lowe’s speech initially reiterated their forward guidance to “not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band”. However, with the support of the Board, Lowe made a material dovish shift in the RBA’s operation of monetary policy. Firstly, Lowe noted “our forward guidance has been forward looking – we have focused on the outlook for inflation, not just current inflation.” But, “we will now be putting a greater weight on actual, not forecast, inflation.” Indeed, Lowe added “The Board will not be increasing the cash rate until actual inflation is sustainably within the target range. It is not enough for inflation to be forecast to be in the target range. While inflation can move up and down for a range of temporary reasons, achieving inflation consistent with the target is likely to require a return to a tight labour market. On our current outlook for the economy – which we will update in early November – this is still some years away.”
Lowe also elevates importance of (actual) full employment, not just ‘progress’
Secondly, Lowe also specified “we want to see more than just ‘progress towards full employment’.” This went even further than their October meeting which added “addressing the high rate of unemployment as an important national priority.” UBS still expect likely rate cut to 0.1% in Nov; while chance of QE also rises Looking ahead, Lowe did not want to pre-commit, saying “the Board has not yet made any decisions,” and referenced Debelle’s options, which led us to expect rate cuts. However, our assessment of Lowe’s ‘issues they are working through’ was a significant lowering of the hurdle to easing near-term. Specifically, the first hurdle is “how much traction any further monetary easing might get in terms of better economic outcomes. When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing.” But now (UBS emphasis), “As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.” Second, Lowe flipped to now argue lower rates reduce financial stability risks, saying “A second issue is the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability…It remains an important issue today, but the considerations have changed somewhat. To the extent that an easing of monetary policy helps people get jobs it will help private sector balance sheets and lessen the number of problem loans. In so doing, it can reduce financial stability risks.” Third, “our balance sheet has increased considerably since March, but larger increases have occurred in other countries;” and in Q&A added, ‘Australia’s 10-year yields are higher than any Western economy. Is there any benefit in having those yields come down…If we buy 5 to 10- year bonds, what benefit would that give in terms of jobs?’ This strongly suggests the RBA is considering QE near-term. However, the timing remains unclear, saying ‘ We are taking our time to work through that issue, but that’s what we are discussing at each meeting.’ One argument against QE is “The RBA’s open market operations and the Term Funding Facility have both contributed to a plentiful supply of liquidity” and “very large increase in the RBA’s balance sheet”, which “should be seen as a further easing of monetary policy”. However, in Q&A Lowe noted ‘On the TFF, we have done what we reasonably can.’ Overall, UBS still expect the RBA is likely to cut rates from 0.25% to 0.1% for all of the targets of the cash rate, 3-year bond yield, and TFF (and lower the deposit rate to ~5bps). Meanwhile, the probability of QE went (again) up today, albeit not necessarily in November, but seems increasingly likely over coming months.
Finally, ten years late. They’ve realised that they can’t forecast and won’t try to tighten on that basis. This is the equivalent of the Fed’s recent proclamation that it will let inflation run hot (if it can find some).
I now expect both a rate cut and QE in November. Next year it will be negative rates and more TFF.
There is no way back. Only going deeper. Until the embrace of MMT.