The Reserve Bank has made a small step towards restoring monetary policy to a normal footing by starting the tapering of its quantitative easing bond purchases to $4 billion a week for the next five months.
That’s a $1 billion a week or 20% cut in the size of the projected purchases over the next five months.
As expected, the Reserve Bank kept interest rates unchanged at 0.10% at its July monetary policy meeting yesterday; maintained the April, 2024 bond as its target for the three-year yield control policy but trimmed its weekly bond purchases (or quantitative easing.
The current $100 billion round of bond purchases is due to end in September.
Reserve Bank Governor Philip Lowe said that “the step-down from $5 billion to $4 billion does not represent a withdrawal of support (for the economy) by the RBA.
The quantitative easing (or QE) will be maintained at the new, lower rate until at least November 11 this year, the RBA said when it will again be reviewed.”
The news saw the value of the Aussie dollar dip suddenly just after 2.30pm and then bounce steeply a minute or so later as the initial knee jerk selling orders were reversed. It was just under 76 cents around 5pm on Tuesday.
The ASX lost ground in the lead up to the announcement at 2.30pm but then bounced as traders found the changes were expected and not alarming but sold off towards the end and the ASX 200 ended the session down 57 points.
Dr Lowe emphasised the RBA “will also continue to purchase government securities, as needed, to ensure that the yield on the April 2024 Australian Government bond remains consistent with the Board’s target and to address any market dislocations in the shorter end of the yield curve.”
These purchases will be announced as relating to the yield target, and will not form part of the QE bond purchase program
In Tuesday’s statement, Dr Lowe said the measures announced “will provide the continuing monetary support that the economy needs as it transitions from the recovery phase to the expansion phase.”
“The economic recovery in Australia is stronger than earlier expected and is forecast to continue,” Dr Lowe said.
“The outlook for investment has improved and household and business balance sheets are generally in good shape. National income is also being supported by the high prices for commodity exports. Domestic financial conditions are very supportive and the exchange rate has depreciated a little recently,” he said.
Dr Lower was confident the recent “one near-term uncertainty” – the impact of the recent virus outbreaks and the lockdowns would not have a lasting effect.
“…the experience to date has been that once outbreaks are contained and restrictions are eased, the economy bounces back quickly,“ he pointed out.
But as solid as the rebound has been in the economy, Dr Lowe made it clear there was still a long way to go before the recovery is sustainable with inflation and wages higher.
“Despite the strong recovery in jobs and reports of labour shortages, inflation and wage outcomes remain subdued. While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest. In the central scenario, inflation in underlying terms is expected to be 1½ per cent over 2021 and 2 per cent by mid 2023.
“In the short term, CPI inflation is expected to rise temporarily to about 3½ per cent over the year to the June quarter because of the reversal of some COVID-19-related price reductions a year ago,” he again pointed out.
June 30 saw the Term Funding Facility for banks expire and Dr Lowe said $188 billion or the $200 billion on offer was taken up.
He said “this facility[..]has contributed to the Australian banking system being highly liquid. Given that the facility is providing low-cost fixed-rate funding for 3 years, it will continue to support low borrowing costs until mid 2024.”
But Dr Lowe again made clear that there is a long way to go before the bank’s policy objectives can be met.
The final paragraph of Tuesday’s statement said the bank “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The Bank’s central scenario for the economy is that this condition will not be met before 2024.
“Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.”
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But there is more confidence in the post-statement meeting from Dr Lowe.
In Tuesday’s statement, the final paragraph (which usually expresses the bank’s summation of the situation) is significantly different to the June statement’s final paragraph:
Here’s the July statement’s final paragraph (the sections in bold are the changes from the June statement):
“The Board remains committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The Bank’s central scenario for the economy is that this condition will not be met before 2024. Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.”
The final paragraph of June statement read:
“The Board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest.”
