Sunday, July 3

Australia’s tapers QE but affirms lower-for-longer rates

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SYDNEY — Australia’s central bank on Tuesday took its first step towards tempering its massive stimulus as employment proves far stronger than expected though actual rate hikes are likely to remain distant.

The Reserve Bank of Australia (RBA) held the cash rate at 0.1% in a widely expected move and reiterated the need for the setting to remain unchanged until 2024 to help spark wage and inflation pressures.

It retained the April-2024 bond for its three-year yield target of 0.1%, as expected, and announced a third round of its quantitative easing program albeit at a size smaller than the previous two rounds.


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The RBA would continue purchasing government bonds past the present September deadline at a weekly pace of A$4 billion, rather than the current A$5 billion. Analysts in a Reuters poll had expected a “flexible” setting.

The Australian dollar was broadly unchanged after the decision, to be last up 0.6% at $0.7570.

Addressing a press conference, Governor Philip Lowe said “today’s decisions are taken against the backdrop of an economy that has bounced back earlier and stronger than expected. The Australian economy is on a positive path.”

The RBA softened a key part of its forward guidance by saying its central scenario was that inflation and employment goals would not met before 2024. Previously, it had said “2024 at the earliest.”


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Market pricing suggests the risk of a move late next year while most economists in a Reuters poll last week had predicted a rate hike in 2023.

“There were two key surprises for us in the RBA Board’s July statement: the tapering of weekly purchases to A$4 billion per week and the change to the forward guidance by removing’at the earliest’,” ANZ economists wrote in a note.

“So, all up, a little more hawkish than we expected, but there are still a lot of bond purchases to come and a rate hike is still a long way off.”

Other economists, including AMP’s Shane Oliver, read the statement as dovish.

The RBA acknowledged recent strength in data but highlighted ongoing virus outbreaks as a key near-term uncertainty. Lowe reiterated the RBA’s central scenario for the economy is that it won’t meet its inflation and employment objectives before 2024.


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“The RBA remains very dovish,” said AMP chief economist Shane Oliver. “They see a stronger recovery occurring… but not enough to signal a bringing forward of interest rate hikes.”

The RBA cut interest rates three times last year to current record lows and launched a massive bond buying program to push borrowing costs down and spark spending.

The monetary stimulus and the government’s fiscal support have boosted Australia’s A$2 trillion economy, which is now larger than its pre-pandemic level. The jobs market is tightening rapidly, the property market is heating up and consumer spending is buoyant.

However, Sydney, Australia’s largest city, last week entered its strictest coronavirus lockdown since the pandemic began while partial curbs were imposed across other major cities.


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These restrictions threaten to take some shine off Australia’s stellar economic performance amid a sluggish vaccination rollout with just about 9% of the adult population inoculated so far, among the lowest in the developed world.

“Australia’s slow vaccine roll-out by developed market standards suggests the RBA is right to not to get too carried away with the recovery,” said Anthony Doyle, cross asset investment specialist at Fidelity International.

The RBA’s dovish tilt contrasts with its New Zealand counterpart, which in May became one of the first advanced economies to signal a move away from pandemic-era settings.

Some economists now expect the Reserve Bank of New Zealand to start hiking interest rates later this year. (Reporting by Swati Pandey and Wayne Cole; Editing by Sam Holmes)


In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.


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