RBA Ends Bond Purchase Program; Reiterates Message Of Patience

• Published on
• 01 Feb 2022, 03:27 PM

By Sophia Rodrigues

(Sydney, February 1, 2022)—The Reserve Bank of Australia left its cash rate target unchanged at 0.1% and announced an end to its bond purchase program while reiterating its message of patience with interest rates hikes.

Following the first board meeting of 2022, the RBA said there are uncertainties about how persistent the pick-up in inflation will be, and that wages growth remain modest and likely to take some time to rise to a rate consistent with inflation being sustainably at target.

“The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve,” the RBA said Tuesday.

The highlight of the meeting was an announcement to end the bond purchase program with the final date being February 10. This was in line with expectations.

The RBA began its bond purchase program (also called Quantitative Easing) in November 2020, initially announcing a program to buy bonds totalling A$100 billion. In February 2021, it said it will buy another A$100 billion after the first program ends.

In July last year, the RBA announced a tapering of its program and switched to a lower weekly buying rate of A$4 billion at least until mid-November after the first A$200 billion of purchases were completed in early September.

In September, the RBA announced it would extend the A$4 billion weekly rate of buying to at least until mid-February. When the program now ends on February 10, the RBA would have bought A$280 billion of bonds and together with bond purchases to correct market dislocations, open market operations and to defend the three-year yield target, the total bond holdings of RBA is expected to be around A$350 billion.

The other highlight of the statement was the RBA’s message of patience and that ending purchases under the bond purchase program does not imply a near-term increase in interest rates.

The RBA acknowledged inflation has picked up more quickly than it has expected but that it remains lower than in many other countries.

It upgraded forecasts for both labor market and inflation, now expecting underlying inflation to rise further to around 3.25% in coming quarters but decline to around 2.75% over 2023.

The RBA is forecasting unemployment rate to decline and fall below 4% later in the year and to be around 3.75% at the end of 2023.

The main sources of uncertainty described in the statement were the pandemic and the persistence of disruptions to supply chains and distribution networks, and their ongoing effects on prices.

“It is also uncertain how consumption patterns will evolve and how this will affect the balance of supply and demand, and hence prices,” the RBA said.

Another important uncertainty is the behaviour of wages at historically low levels of unemployment, the RBA added.

--Contact: Sophia@centralbankintel.com