The RBA used today’s SOMP to push back on market pricing for hikes. In their central case, core inflation ends 2023 at 2.4%yoy, so the cash rate only starts to rise in 2024. More important is the upside scenario, where the unemployment rate is sub 4% and core inflation is above 2.5% in 2022 … and yet the RBA only starts hiking in 2023. It follows that the hurdle for a hike in 2022 is extremely high.
The RBA dumped YCC at their Nov’21 meeting but leant dovish against market pricing. Gov Lowe emphasized that the first hike might still be after April 2024 and said very clearly that hikes aren’t on the table in 2022. So, the short end is fully priced. I am cautious about following RBA promises, so I prefer the long end: AUD 5y5y seems high both in outright terms and against the US.
The RBA will dump YCC, keep rates on hold, and very likely hold QE at 4bn per week at their Nov’21 meeting. If there’s a surprise it will be an early taper. Both growth and inflation forecast will come up a bit, but not enough to signal a 2022 hike. Inflation in a 2.25% to 2.5% range in 2023 is consistent with hikes starting in 2023. I expect rates to rally a bit as there’s so much in the price.
Higher than expected Q3’21 CPI probably means the RBA will upgrade away from calendar-based forward guidance in November. A consequence of this is that they’ll likely stop targeting the April 23 and April 24 bonds. With terminal rates stable at ~2.25%, the curve is likely to flatten. It’s mostly a short end trade now.