RBA Lowe: QE Taper Does Not Change Substantial, Ongoing Degree of Support to Econ

• Published on
• 08 Jul 2021, 12:31 PM

--Evidence is cenbank bond-buying have impact through stock, not flow of purchases
--Bond-buying taper does not change substantial, ongoing degree of support to econ
--Condition for rise in cash rate is data-dependent, not calendar
--Expect it will take until 2024 for inflation to be sustainably within 2%-3% target
--Bond purchases will end prior to any increase in cash rate
--Bond purchases do not represent withdrawal of support from RBA
--Income growth is strongest when unemployment dips below 4%
--One near-term uncertainty is recent virus outbreak, lockdowns
--Important consideration for outlook is how long border remains closed

By Sophia Rodrigues

(Sydney, July 8, 2021)—The Reserve Bank of Australia’s move to taper bond purchases after September does not represent withdrawal of support because the impact is through stock of bonds, not flow, Governor Philip Lowe said Thursday.

Lowe made the comments in a speech titled, “The Labour Market and Monetary Policy,” delivered online to the Economic Society of Australia.

Lowe said that by mid-November, the total bond purchases by the RBA will have amounted to A$237 billion, representing a little more than 30% of Australian government bonds on issue and 15% of state of territory bonds.

“This represents a substantial and ongoing degree of support to the Australian economy. The adjustment in the rate of weekly purchases does not change this,” Lowe said.

Following the board meeting on Tuesday, the RBA announced it will buy bonds at the rate of A$4 billion a week, down from A$5 billion following the completion of round two of bond purchase program in September and until at least November 11. At the November board meeting, the RBA will review the size of bond purchases.

The bond-buying is helping the progress towards the RBA’s goals and hence it is being continued. But while making the decision the RBA would consider the effectiveness of the purchases, the decision of other central banks, and most importantly further progress towards its goal for inflation and employment.

Lowe said the RBA would end the bond purchases prior to any increase in the cash rate and reminded yet again that the condition for an increase in the cash rate depends on the data, not the date.

“It is based on inflation outcomes, not the calendar,” Lowe said.

Lowe also reiterated that wage growth will need to exceed 3% for inflation to be sustainably in the target band, assuming that labor productivity continues to increase, and the labor share of national income remains broadly steady. The RBA will want to see inflation results before changing interest rates, Lowe added.

Lowe said an important consideration for the outlook is how long the borders remain closed. If borders open gradually, it would relive some of the current pressure points in the labor market but if it remains closed for an extended period, wages growth would pick up more quickly, but production and investment would also be constrained, Lowe said.

The RBA is expecting further increase in labor force participation rate, Lowe said.

Lowe cited a study done by RBA staff which suggest that tighter labor markets do generate stronger wage increases and the relationship seems to be stronger at unemployment rates below 5%.

“These are important conclusions from a policy perspective, especially given the RBA’s strategy is to get the unemployment rate down so that wages growth picks up and inflation returns in a sustainable way to the target range,” Lowe said.

In the near term, one source of uncertainty is the recent outbreaks of the virus and the lockdowns which the RBA is carefully watching.

But Lowe also reminded that Australia’s experience has been that, once an outbreak is contained and restrictions are lifted, the economy and jobs bounce back quickly.

--Contact: Sophia@centralbankintel.com