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Monetary Policy Update: The Slow Journey Back To Normal

08 July 2021

Summary:

The RBA is in the process of gradually unwinding its ‘unconventional’ policies;
Providing the economy remains strong they should be finished that process within 12-18 months;
Financial markets are pricing the first rate hike for H2 2022;
That looks early given what the RBA says it is trying to achieve.
But the strength of the economy and supply constraints will see rates move sooner than what is currently suggested by the RBA (H1 2023).

The Australian economy has bounced back more sharply than anyone expected. Partly that has been a result of the (generally) good health outcomes. It has reflected the massive fiscal stimulus that the federal and all state governments are still pumping into the economy. The RBA has played its part.

Following the July meeting the RBA took its next (gradual) step in unwinding its ‘unconventional’ (QE, yield curve control, term funding facility) monetary policy support for the economy. We can expect further gradual unwinding of those unconventional measures providing the economy continues to power ahead (which is very likely). Those ‘unconventional’ programs are likely to finish in 12-18 months’ time.

Only once the ‘unconventional’ programs are finished will interest rates be changed. Financial markets are speculating that the first rate hike could be as early as the second half of next year. That looks early given what inflation outcomes the RBA is saying it is trying to achieve. But my view on the timing of the first move (H1 2023) is earlier than the RBA’s current view.