The Australian dollar has softened although the latest RBA policy update has had only limited impact on its performance. The Reserve Bank of Australia plans to review policy in July but economists at MUFG Bank expect an extension of the current dovish stance, which will not be a hurdle for AUD appreciation. 

RBA remain committed to maintaining highly supportive monetary conditions

“The RBA maintained the cash rate and three-year yield target at 0.10%. Governor Lowe stated that the RBA will review their policy stance in July. The RBA needs to decide whether to shift yield curve control to target the November 2024 maturity bond from the current April 2024 bond. At the same time, the RBA will need to lay out plans for their QE programme with current AUD100 trance of purchases set to end at the end of September. We expect the RBA to announce an extension of their current dovish policy stance in July.”

“The RBA has acknowledged that the Australian economy continues to recover more strongly than expected from the COVID-19 shock and raised again their GDP forecasts for this year to 4.75% and next year to 3.5%. Above trend growth should keep downward pressure on the unemployment rate which is expected to continue falling to around 5% at the end of this year and 4.5% at the end of next year. The RBA estimates that it probably needs to fall closer to 4.0% before wage growth accelerates.”

“More concerning for the RBA will be below target inflation. The latest CPI report revealed that core inflation (trimmed mean) fell to a record low of 1.1% in March. The RBA expects underlying inflation to be around 1.5% this year before rising to 2% by mid-2023. The lack of underlying inflation pressure will again encourage the RBA to maintain looser policy for longer.” 

“The RBA remains committed to plans not to begin rate hikes until 2024 at the earliest. The RBA’s continued dovish policy stance is set to remain a dampener on further AUD upside as they lean against improving fundamentals. We continue to believe though that it will not prevent further AUD gains from higher commodity prices and improving global investor risk sentiment. We still expect AUD/USD to rise above the 0.8000-level.”