RBA Lowe: To End QE In Feb If Economy Makes Faster Progress Vs Forecast

RBA Lowe: Discussed future of bond purchase program at Dec meeting
--Three Options For QE: Taper to end in May, Taper and review, Cease Purchases
--Taper with May end-point Consistent with RBA’s November’s forecasts
--If Better-Than-Expected Progress, then case to end purchases in Feb
--If Slower-than-expected progress, then retaining flexibility and review in May Likely
--Still “fair way” from point of cash rate hike
--Under “central scenario” conditions for hike will not be met next year
--Take Time to meet condition for hike; RBA prepared to be patient

By Sophia Rodrigues

(Sydney, December 16, 2021)—The Reserve Bank of Australia is prepared to end bond purchase program in February if progress towards its employment and inflation goals is better than what the forecasts suggested in November, Governor Philip Lowe said Thursday.

Lowe also said that the condition for increase in the cash rate will not be met next year based on the central scenario and it will take time for the condition to be met.

Lowe made the comments in a speech to the CPA Australia Riverina Business Conference in Wagga Wagga. The title of the speech is, “The RBA and the Australian Economy.”

Lowe said the RBA discussed the future of the bond purchase program at its December board meeting and laid down three options that it will consider at the February meeting. The first option is to further taper and end purchases in May, the second is to taper and review the situation in May, and the third is to cease bond purchases altogether in February.

The option to end purchases in May is broadly consistent with the RBA forecasts in November for employment and inflation, Lowe said.

“If better-than-expected progress towards the Board’s goals was made, then the case to cease bond purchases in February would be stronger,” Lowe added.

If progress is slower than expected or if the outlook becomes more uncertain, then the RBA would taper and review the program again in May.

Lowe said the decision on the program will depend upon the news between now and February including on inflation, labor market, spending in the economy over the summer, actions of other central banks and the effects of the Omicron variant.

On cash rate hike, Lowe said the RBA is still “a fair way” from the point where actual inflation is sustainably in the 2% to 3% target range.

“We are still a fair way from that point. In our central scenario, the condition for an increase in the cash rate will not be met next year. It is likely to take time for that condition to be met and the Board is prepared to be patient,” Lowe said.

Earlier in the speech, Lowe said spending is bouncing back quickly, especially on services, with the lifting of lockdowns.

While the Omicron outbreak represents a downside risk, Lowe said he expects the positive momentum in the economy to be maintained through the summer, underpinned by the opening up of the economy, the high rates of vaccination, significant fiscal and monetary support, and the strengthening of household and business balance sheets over the past year or so.

One driver of “strong growth in consumption over coming months,” is increase in savings and this will happen if people have the confident to spend. According to RBA’s estimate, total additional savings by households during the pandemic has amounted to more that A$200 billion and many businesses have also increased their cash reserves.

On house prices, Lowe reiterated the RBA does not target housing prices and raising interest rates to deal with higher housing prices is not a solution. At the same time, he reminded that at some point in the future interest rates will increase from record lows. He also urged banks and households to pay attention to buffers for higher interest rates imposed by Australian Prudential Regulation Authority.

On inflation too, Lowe reiterated that inflation situation in Australia is different from the United States. He reminded that in the RBA’s central scenario, underlying inflation is expected to increase to 2.5% over 2023.

--Contact: Sophia@centralbankintel.com