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Chief economist update: A date with the RBA in July

The Reserve Bank of Australia's (RBA) May the fourth Board meeting would have been a ho-hum event had it not been for the month of July.

As expected, the RBA left monetary policy settings unchanged - "including the targets of 10 basis points for the cash rate and the yield on the 3-year Australian government bond, as well as the parameters of the Term Funding Facility and the government bond purchase program".

As expected, it lifted Australia's GDP growth forecast to 4.75% this year - now in line with both the OECD and IMF's latest projections - from 3.5% it predicted in its February statement.

This stronger economic growth would boost the labour market with the RBA now expecting the jobless rate "to be around 5 per cent at the end of this year and around 41/2 per cent at the end of 2022".

It all seems to be cut and dried. With the domestic economy's outlook getting betterer and betterer - despite the end of the JobKeeper - the RBA, along with the Federal government - cannot be faulted for declaring its battle against the pandemic "Mission Accomplished".

But unlike the Bank of Canada which walked its optimistic talk by announcing a "tapering of QE" at its 21 April meeting, the RBA's holding out till July. To wit: "At its July meeting, the Board will consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond. The Board is not considering a change to the target of 10 basis points. At the July meeting, the Board will also consider future bond purchases following the completion of the second $100 billion of purchases under the government bond purchase program in September."

July is the month when the RBA decides to maintain QE or taper QE or increase QE.

RBA governor Philip Lowe's statement gives us a wink and a nod: "Despite the strong recovery in economic activity, the recent CPI data confirmed that inflation pressures remain subdued in most parts of the Australian economy. A pick-up in inflation and wages growth is expected, but it is likely to be only gradual and modest. In the central scenario, inflation in underlying terms is expected to be 11/2 per cent in 2021 and 2 per cent in mid 2023."

"The board is prepared to undertake further bond purchases to assist with progress towards the goals of full employment and inflation. The Board places a high priority on a return to full employment."

And as for interest rates: "It will not increase the cash rate until actual inflation is sustainably within the 2-3% target range. For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest."

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