PREVIEW: RBA Statement May Reflect Stronger Commitment to 3-Yr Target

• Published on
• 01 Sep 2020, 10:58 AM

By Sophia Rodrigues

The Reserve Bank of Australia is expected to leave its current monetary policy settings unchanged at the monthly board meeting Tuesday, and reiterate its commitment to undertake further government bond purchases to ensure 3-year yield remains consistent with target.

One possibility is the RBA might use stronger language to drive yields lower, so it doesn’t have to do lot of bond-buying.

In the past month, the RBA bought a total A$10 billion of the April 2023 and the April 2024 government bonds but has not succeeded in ensuring their yields are in line with the 0.25% target for 3-year bonds.

At the bond-buying auction on Monday, the weighted average yield on the April 2023 bond was 0.2583% and on the April 2024 bond it was 0.2960%. In the market, the yield on the April 2023 bond is currently around 0.26%-0.27% and on the April 2024 bond it is 0.29%-0.30%.

It is likely the RBA is aiming for the April 2023 yield to fall below 0.25% given it will be replaced by April 2024 in the next few months as the benchmark 3-year bond. The RBA may seek to achieve this either by scaling up its purchases or using a stronger language to show its commitment to the target.

One important question is whether the statement will make a mention of the Australian dollar for the first time since the early March statement. Given just last month the RBA said the level of the Australian dollar appears broadly consistent with the terms of trade and interest rate differentials, there is a possibility it may not.

But if the RBA would like to put a lid on further appreciation and prevent the exchange rate from moving towards $0.80 as some economists expect, it is possible the Australian dollar would find a mention.

--Contact: Sophia@centralbankintel.com