RBA to Begin QE Tapering in September

Central banks news

As widely anticipated, the RBA announced some changes in the monetary policy. The overall tone of the meeting and the policy statement is upbeat about the economic recovery while cautious over the uncertainty and subdued inflation.

Policymakers remain optimistic over economic developments. As noted in the meeting, “the outlook for investment has improved and household and business balance sheets are generally in good shape”. While cautioning that “one near-term uncertainty is the effect of the recent virus outbreaks and the lockdowns”, they noted that “the experience to date has been that once outbreaks are contained and restrictions are eased, the economy bounces back quickly”. The central bank also highlighted the fall in the unemployment and suggested that “job vacancies are high and more firms are reporting shortages of labour, particularly in areas affected by the closure of Australia’s international borders”.

Despite the optimism, the members remain concerned about subdued wage outcomes. They expect that any improvement would be “only gradual and modest”. The central bank forecast that core underlying inflation is forecast would be “1.5% over 2021 and 2% by mid- 2023”.

Several tweaks are made in the current monetary policy. Policymakers decided to April 2024’s bonds as the ones for the yield target at the target of 0.1%. Last month, they hinted an extension November 2024’s bonds. The current tranche of QE purchases will continue as scheduled – until early September. After that, purchases will be made at a weekly pace of AUD4B until at least mid November.

Policymakers explained the rationales of the tweaks. As noted in the policy statement, policymakers noted that QE is “playing an important role in supporting the Australian economy” and the RBA would “continue to purchase bonds given that we remain some distance from the inflation and employment objectives”. However, “stronger-than-expected economic recovery and the improved outlook” suggest that a slow pace of asset purchases is warranted. The central bank has also pledged to review the new approach in November, so that “the board to respond to the state of the economy at that time”.

The cash rate stays unchanged at 0.1% and policymakers reiterated the forward guidance that no rate hike is likely until 2024.