Markets Live, Tuesday, 16 November 2021

The Reserve Bank board is alert to risks in its inflation forecasts, saying the likelihood of prices rising faster than expected has changed in the past month.

In the RBA’s meeting minutes for November 2, published on Tuesday morning, the central bank re-affirmed its expectation of keeping the cash rate at its current record low until 2024.

But board members “acknowledged that the risks to the inflation forecast had changed, with the distribution of possible outcomes shifting upwards”.

“The main uncertainties related to the persistence of the current disruptions to global supply chains and to the behaviour of wages at the lowest unemployment rate in decades,” the minutes said.

The central bank wants to see underlying inflation within its 2 to 3 per cent target bracket for a period of time before it is prepared to increase rates.

The RBA board noted that as risks to inflation forecasts shift higher, it had “become possible that an earlier increase in the cash rate would be appropriate”.

The bank ditched its yield target on three-year Australian government bonds following its meeting earlier this year. There was a major jump in the interest rate on these bonds following higher than expected inflation figures at the end of October, the week before the November meeting.

“The decision by the Bank not to conduct target bond purchases during the period between the [consumer price index] release and the Board meeting had added to this market dynamic,” the meeting minutes said.

“Implied expectations of the future cash rate had also increased notably over the preceding month to the highest levels seen this year, with several increases in the cash rate priced in by the end of 2022.”

In the circumstances at the time, the RBA said that retaining the target could see the Bank buying all freely tradable bonds in the April 2024 bond line, limiting the usefulness of the target as an anchor for other rates.

The RBA acknowledged the decision to stay out of the market between the inflation data release and the board meeting had resulted in “uncertainty” about policy intentions and affected market pricing and liquidity but said it was a difficult choice to defend a target and lose credibility, or wait to consider the implications of the data.

“Members saw merit in reviewing the operation of the yield target and its effectiveness as part of the broader package of monetary policy measures introduced in March 2020. This would be done in 2022 and in light of additional information on the effect of the overall policy package on the Bank’s goals,” the minutes read.

The board members reaffirmed the plan to continue with the bond purchase program until mid-February next year, at which point the board will review if it was still need to support the inflation and unemployment outlook.

The review will consider…