MNI RBA Review - February 2022
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MNI RBA Review - February 2022
Meeting Date: Tuesday 1 February 2022
Link To Statement: https://www.rba.gov.au/media-releases/2022/mr-22-02.html
Contents
• Page 2: RBA 1 February 2022 Meeting Statement
• Page 3-4: RBA STATE OF PLAY: RBA Stays Firm On Cash Rate View, Drops QE
• Page 5-7: Sell-Side Analyst Views
MNI POV (Point Of View): Goodbye QE, But Remaining
Patient When It Comes To Cash Rate Hikes
The RBA left its cash rate target unchanged and announced an end to its QE purchases come 10 February, as
expected. The Bank also noted that it will “consider the issue of the reinvestment of the proceeds of future bond
maturities at its meeting in May.” Consensus looks for the Bank to allow the organic rundown of its balance sheet
i.e. allowing bond holdings to mature, with no reinvesting of the proceeds, holding off from bond sales. The Bank
was also keen to underline the notion that the cessation of its QE program does not imply that there will be a rate
hike in the near-term. This was seemingly the latest instance of the pushback against market pricing re: rate hikes.
The forward guidance passage on interest rates was more dovish than the median expectation, with the central
bank maintaining its reference to a patient approach re: rate rises via its now familiar state-based format, while
underscoring projections surrounding a “gradual” pickup in wage growth and the impact of “modest” wage growth
on underlying inflation. The Bank pointed to continued questions re: the stickiness of higher inflation, even though it
now looks for a higher near-term peak in underlying inflation, in addition to projecting a higher underlying inflation
profile in ’23 (underlying inflation is now seen above/within the upper half of the RBA’s 2-3% target band through
’23, i.e. for 2 years).
The RBA adjusted its unemployment forecasts lower in the wake of the swifter than expected progress on that
front, noting that “faster-than-expected progress has been made towards the RBA's goals and further progress is
likely.”
The RBA failed to make any meaningful adjustments to its GDP growth expectations (a higher base and observed
Omicron-related caution when it comes to consumer spending resulted in a mark down for ’22 GDP growth),
Fig. 1: RBA Cash Rate Pricing Implied By The IB Strip
The lack of a policy pivot re: rate hikes allowed the IB
strip to unwind a very modest amount of the rate hike
premium that was priced in. Still, IB volumes were
light, with the biggest move coming in the Jul-Oct ’22
zone of the strip, which saw ~8bp of the tightening
pricing unwound. 15bp of tightening is now fully priced
for June ’22 vs. May ’22 pre-meeting. Sell-side
consensus is seemingly forming around the idea of a
15bp rate hike in August, which is less aggressive than
current market pricing. Focus moves to RBA Governor
Lowe’s first address of ’22, due Wednesday, with
questions and references surrounding the prospects of
’22 rate hikes set to receive the most attention.
Source: MNI - Market News/ASX/Bloomberg
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Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBRBA 1 February 2022 Meeting Statement
At its meeting today, the Board decided to maintain the cash rate target at 10 basis points and the interest rate on
Exchange Settlement balances at zero per cent. It also decided to cease further purchases under the bond
purchase program, with the final purchases to take place on 10 February.
The Omicron outbreak has affected the economy, but it has not derailed the economic recovery. The Australian
economy remains resilient and spending is expected to pick up as case numbers trend lower. The RBA's central
forecast is for GDP growth of around 4¼ per cent over 2022 and 2 per cent over 2023. This outlook is supported by
household and business balance sheets that are in generally good shape, an upswing in business investment, a
large pipeline of construction work and supportive macroeconomic policy settings. The main source of uncertainty
continues to be the pandemic.
The labour market has recovered strongly, with the unemployment rate declining to 4.2 per cent in December.
Hours worked are estimated to have declined significantly in January due to the Omicron outbreak, but high
numbers of job vacancies suggest further gains in employment over the months ahead. The RBA's central forecast
is for the unemployment rate to fall to below 4 per cent later in the year and to be around 3¾ per cent at the end of
2023.
Wages growth has picked up but, at the aggregate level, has only returned to the relatively low rates prevailing
before the pandemic. A further pick-up in wages growth is expected as the labour market tightens. This pick-up is
still expected to be only gradual, although there is uncertainty about the behaviour of wages at historically low
levels of unemployment.
Inflation has picked up more quickly than the RBA had expected, but remains lower than in many other countries.
The headline CPI inflation rate is 3.5 per cent and is being affected by higher petrol prices, higher prices for newly
constructed homes and the disruptions to global supply chains. In underlying terms, inflation is 2.6 per cent. The
central forecast is for underlying inflation to increase further in coming quarters to around 3¼ per cent, before
declining to around 2¾ per cent over 2023 as the supply-side problems are resolved and consumption patterns
normalise. One source of uncertainty is the persistence of the disruptions to supply chains and distribution
networks and their ongoing effects on prices. It is also uncertain how consumption patterns will evolve and how this
will affect the balance of supply and demand, and hence prices.
Financial conditions in Australia remain highly accommodative. Together, the RBA's bond purchase program, the
funding provided under the Term Funding Facility and the low level of interest rates are providing important support
to the Australian economy as it recovers from the effects of the pandemic. The Australian dollar exchange rate is
around its lows of the past year or so. Housing prices have risen strongly, although the rate of increase has eased
in some cities. With interest rates at historically low levels, it is important that lending standards are maintained and
that borrowers have adequate buffers.
The decision to end purchases under the bond purchase program follows a review of the actions of other central
banks, the functioning of Australia's bond market and the progress towards the goals of full employment and
inflation consistent with target. Many other central banks have ended, or will soon end, their bond purchase
programs. More importantly, faster-than-expected progress has been made towards the RBA's goals and further
progress is likely. In these circumstances, the Board judged that now was the right time to end the bond purchase
program. Since the start of the pandemic, the RBA's balance sheet has more than tripled to around $640 billion,
with this expansion providing continuing support to the economy. The Board will consider the issue of the
reinvestment of the proceeds of future bond maturities at its meeting in May.
The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to
full employment in Australia and inflation consistent with the target. Ceasing purchases under the bond purchase
program does not imply a near-term increase in interest rates. As the Board has stated previously, it will not
increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. While inflation has
picked up, it is too early to conclude that it is sustainably within the target band. There are uncertainties about how
persistent the pick-up in inflation will be as supply-side problems are resolved. Wages growth also remains modest
and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being
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Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBsustainably at target. The Board is prepared to be patient as it monitors how the various factors affecting inflation in
Australia evolve.
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Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBMNI STATE OF PLAY: RBA Stays Firm On Cash Rate View,
Drops QE
By Lachlan Colquhoun
SYDNEY (MNI) - The Reserve Bank of Australia is maintaining its dovish stance relative to other developed market
central banks and declined to update its interest rate guidance despite recent bullish data on employment and more
importantly inflation.
At Tuesday's first board meeting for 2022, the RBA did however announce an end to its bond buying programme,
which will continue at the rate of AUD4 billion per week and end on Feb 10, see: MNI BRIEF: RBA Patiently Waits
On Inflation As QE Ends.
Interest rates were unchanged, as expected, at the record low of 0.10% but the bank declined to bring forward its
guidance on an interest rate hike despite trimmed mean inflation - its preferred measure - hitting 2.6% in the last
quarter of 2021, well within the RBA’s 2% to 3% target range.
INFLATION UNCERTAIN
The RBA's explanation was that it is “too early” to conclude that inflation is sustainably within the target band, and
there was no update on the most recent comments on a rate rise which it has said is possible in late 2023 or even
as late as 2024, see: MNI STATE OF PLAY: RBA Rate Hike Timing View Under The Scanner.
The RBA said it expects underlying inflation to reach 3.25% in coming quarters before falling to 2.75% over 2023
as supply chain issues ease.
“There are uncertainties about how persistent the pick-up in inflation will be some time yet before aggregate wages
growth is at a rate consistent with inflation being sustainably at target,” the RBA statement said.
“Wages growth has picked up but, at the aggregate level, has only returned to the relatively low rates prevailing
before the pandemic.”
Wages rose by an annualised 2.2% in the third quarter of 2021 and Q4 data is due on Feb. 23. The RBA expects
wages growth to be gradual as the labour market, where unemployment is at 4.2%, continues to tighten, see: MNI
INTERVIEW: Australia Wage Growth Returning to Normal: ABS.
IN LINE WITH OTHER CENTRAL BANKS
On the bond buying programme, the RBA said the decision to end the programme followed a review of the actions
of other central banks, the functioning of Australia’s bond market and “faster than expected” progress towards the
goals of full employment and the inflation target.
The programme had tripled the RBA balance sheet to around AUD640 billion, and the bank would consider the
issue what to do with future bond maturities at its meeting in May.
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Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBSell-Side Analyst Views
ANZ: We think the RBA will get the confirmation it seems to want from wages with the publication of the Q2 Wage
Price Index (WPI) in mid-August, paving the way for a September 2022 rate hike. With policy extremely stimulatory
we think the RBA’s initial moves will be quite quick, especially when we consider that the effective cash rate will
initially rise by less than the target. We see the cash rate at 0.75% by November 2022, rising to 2% by the end of
2023. We see this as below the eventual peak in the cash rate, which we think could be above 3% - though the
later stages of the tightening cycle are likely to be slower than the initial as policy approaches neutral and then
moves into restrictive territory. We don’t completely rule out wages growth in both the WPI and GDP data showing
sufficient momentum by Q1 to convince the RBA it should move sooner than our September expectation. The RBA
Board is alert to this possibility,
• The Board has delayed decision on what to do with the proceeds of maturing bonds until its May meeting.
We had thought an intention to move to so called quantitative tightening (QT) was quite likely at this
meeting, though with few bonds the RBA owns maturing until July there was no immediate urgency to
decide either way. We think the decision in May will be to adopt ‘passive’ QT, where the RBA shrinks its
balance sheet as bonds mature, rather than actively selling down its holdings.
Barclays: In our view, the statement today reflects the RBA's growing confidence on recovery with a slew of strong
data, including the December jobs report and the Q4 inflation print - both of which showed a stronger economy than
the bank had projected. Indeed, the central bank had sounded more optimistic about the growth recovery since
reopening than it did in its December meeting. Given the tone of the statement today and the actions of other
central banks, we now bring forward our rate hike call to August 2022 from November 2022 earlier. We now expect
a 15bp rate hike in August, followed by a 25bp rate hike in November. We still expect the pace of rate increases to
be gradual and see two more hikes in 2023 with the RBA taking the cash rate to 1.00% by the end of next year.
CBA: This statement clearly articulates the Board’s implicit necessary condition to raising the cash rate; higher
wages growth (note that the Governor did not preview the RBA’s updated wages forecasts today). We expect to
see wages inflation accelerate in the upcoming Q421 Wage Price Index (WPI). That said, it is likely that we will
require 2 to 3 quarterly prints that show strengthening wages growth before the RBA pulls the rate hike trigger.
• Thus, CBA’s central scenario, which sees the RBA commence normalising the cash rate in Q322, remains
on track. We have pencilled in a first increase of 15bp in August 2022, which would take the cash rate to
0.25%. We expect that to be followed by an increase of 25bp in September 2022. We have three further
25bp hikes in Q422, Q123 and Q223 that take the cash rate to 1.25% (our estimate of neutral).
• Overall, we expect it to be a shallow and gradual tightening cycle given the elevated level of household
indebtedness. It is possible the RBA needs to take the policy rate from a neutral setting to a contractionary
one in 2023 if the RBA needs to put downward pressure on wages and consumer inflation (this would
result in a terminal rate above 1.25%). That is a risk, however, and not our central scenario.
Goldman Sachs: Ahead of an important speech by RBA Governor Lowe tomorrow, we assess the forecast
upgrades in today’s statement as consistent with the RBA revising its base case to a 2023 lift-off for the cash rate
(from 2024) - with a late 2022 lift-off in an upside scenario. Our own base case is a November 2022 lift-off,
contingent on a gradual rise in wages growth to 3.0% through 2022.
J.P.Morgan: The RBA delivered on expectations at today’s decision, holding the cash rate target at 0.10% and
ending the QE program. The statement was on the more dovish end of market views but close to our expectations,
in that the board does not view the inflation target as sustainably achieved, and is still conditioning the latter on
wages growth. The specifics on wages have admittedly shifted (a move we thought would come around mid-year,
and more definitively). Previously, wages growth needed to be “materially higher than it is currently”, now the
degree of required uplift is less clear: “wages growth also remains modest, and it is likely to be some time yet
before aggregate wages growth is at a rate consistent with inflation being sustainably at target”.
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Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DB• There are a few other references in the statement which suggest the board is not inclined to move in the
next few meetings, and is setting up barriers to lower expectations for action. First, even though the staff is
ascribing significant information value to the last CPI print, now forecasting core inflation to break above
the target band to 3.25% “in coming quarters”, the board thinks it is still “too early to conclude” that the
target is sustainably achieved. In our view the 3.25% mark is most likely to be hit in the 2Q data, i.e. two
reports’ time. Despite this new forecast (and the projection of a staggeringly low 3.75% for unemployment
at the end of 2023), the board seemingly needs more corroboration from wages. This sets up a high bar for
the nominal data over the couple of CPI readings. It also pushes back the timing on which the forecast can
materially beat expectations, since the staff only expect core to normalize “over 2023”.
• Second, the Governor argues “ceasing purchases... does not imply a near-term increase in interest rates”.
While that separation is fairly predictable, it is also quite a strong declaration that didn’t necessarily need to
be made. Lastly, the statement also announces that a decision on reinvestments of future bond maturities
will be made in May. Previously Governor Lowe had said the board had plenty of time to mull this question,
as the lumpier maturities aren’t due until 2023. Since reinvestment is usually not a very data-dependent
question, it’s not clear what the board is waiting for, and this seems like an incremental step that has been
shoe-horned in as the next agenda item for three months’ time, before rate hikes are appropriate (note this
decision regards future reinvestments, so still leaves space for hikes to start between Q322 and Q223,
preserving the usual ordering). We still expect a first move in Q422 (November).
RBC: The RBA board met for the first time this year following its traditional January hiatus. In a nutshell, we would
characterize the statement as dovish, especially versus market pricing, and despite material upward revisions to its
inflation forecasts and clear confidence in the growth outlook and labour market. While its full set of macro
forecasts will be released on Friday in the quarterly Statement on Monetary Policy (SoMP), the snippets today
suggest that the RBA’s central scenario is still a 2023 lift-off albeit probably H1 rather than end 2023.
• While the RBA appears more confident in the economy’s ability to deal with each wave of Omicron from an
activity and labour market perspective, it is clearly less sure about the impact on prices. Its emphasis on
higher wages emerges through this lens. Tighter labour markets with reduced capacity which lifts wages
growth more materially is the only path in their view to sustained higher inflation. We expect this to emerge
more clearly as 2022 unfolds reflecting that resilience, a stronger starting point for the labour market, the
likelihood of continued constrained labour supply even when the sovereign border opens up more fully and
as inflation expectations continue to rise. We also note that the 3 key headwinds to wages growth are
starting to abate, albeit modestly - public sector wage freezes have ended, annual wages under EBAs have
risen to 2.7%, the fastest pace since Q220 and we would expect the minimum wage increase for 2022
(effective 1 July) to be 3%+.
• Risk reward favours the RBA’s patient approach and optionality. It has gradually moved from calendar
based guidance to state based since Oct ‘21 and should wages surprise them to the upside, they can
easily move and justify their policy actions. We have argued for some time that as long as annual wages
growth is moving in the right direction towards 3% against the backdrop of near full employment and active
global central banks, the case to lift-off and move away from ultra-accommodative settings should
strengthen. We expect this set of conditions to emerge more fully in H2 and look for lift-off in Aug ‘22. By
that time, the RBA will have had 2 more inflation prints with core inflation likely above 3%, 2 firmer WPIs
and likely multiple hikes by the Fed, BoC, BoE and RBNZ. The RBA will lag the global cycle but probably
not for as long as it thinks.
Westpac: Note that the RBA has not put a date on the timing of the first move since the October meeting last year
when he referred to “this condition will not be met before 2024.”
• However, in speeches he maintained the “not in 2022” line as recently as December 16. The most
important part of his speech tomorrow to the National Press Club will be whether he retains that” not in
2022” guidance - I would be very surprised if he chooses to do that!
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Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DB• The Governor gives two arguments against the sustainability of the recent inflation increase -
“uncertainties about the outlook for supply side problems” and “it is likely to be some time yet before
aggregate wages growth is at a rate consistent with inflation being sustainably at target.”
• The choice of “aggregate” wages growth would appear to emphasise the Wage Price Index. Recall that its
last three quarterly prints have been 0.6%; 0.4%; and 0.6%. The next print will be on February 23 to be
followed by May 18.
• To get anywhere near the 3% target at the next release the Index would need to print an unlikely 1.4% -
that incredibly high hurdle, coupled with the Governor’s statement today should knock out any expectation
of a May rate hike.
• Westpac expects that the next two WPI’s will show “aggregate” wages growing at around 2.5% with a 3%
6-month annualised pace - enough, along with the sustained lift in underlying inflation, and 13 year low in
the underemployment rate, to justify the August move. We remain comfortable with our August call for the
first move.
• Predictably, the Governor has attributed the wages story as the key for the RBA concluding that their
revised forecasts (which are consistent with higher rates) are still uncertain and more evidence is required
before it can act.
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Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBYou can also read
