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RBA Review – QE Might Increase Further to Curb Rising Yields and Exchange Rate

As widely anticipated, the RBA left all monetary policy measures unchanged. As a summary, the cash rate target, the 3-year Australian Government Bond ‘Yield Curve Control’ (YCC) target and the Term Funding Facility (TFF) interest rate all stay at 0.1%. The size of the asset purchase program (QE) is also maintained at AUD 200B. While acknowledging the upbeat economic developments, policymakers pledged to make further adjustments to its purchases in response to market conditions”.

Policymakers acknowledged the economic improvement. As noted in the statement, the recovery “is well under way and has been stronger than was earlier expected”, but cautioned that “subdued” underlying wages and price pressures will persist “for some years”. In response to the surging housing market, the central bank noted that “housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak. Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates”. The central bank also noted that the global economy has improved “due to the ongoing rollout of vaccines”. It also acknowledged that “global trade has picked up and commodity prices have increased over recent months”.

In response to the recent rise in longer-dated bond yields, the central bank suggested that it “partly reflects a lift in expected inflation over the medium term to rates that are closer to central banks’ targets”. It also indicated that “changes in bond yields globally have been associated with volatility in some other asset prices, including foreign exchange rates. The Australian dollar remains in the upper end of the range of recent years”.

At the previous meeting, the RBA surprisingly doubled the size of the asset purchase program to AUD100B and extended the operation to September. The central bank noted that “to date, a cumulative $74 billion of government bonds issued by the Australian government and the states and territories have been purchased under the initial AUD100B program”. Moreover, “a further AUD100 billion will be purchased following the completion of the initial program and the bank is prepared to do more if that is necessary”.

On the policy outlook, Governor Philip Lowe reiterated that the cash rate will not increase at least until 2024. The central bank has set the target to keep the policy rate low “until actual inflation is sustainably within the 2 to 3%”. Lowe added that, “for this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market”. We expect the cash rate will stay unchanged for at least 3 years, while the size of QE will increase by another AUD100B to AUD 300B later this year.