RBA Sep Minutes: Considered Other Central Bks Taper, Own Faster Bond-Buying

(This story was first published on Tuesday, September 20 at 12:05 PM)

By Sophia Rodrigues

(Sydney, September 21, 2021)—In making its decision on tapering of bond purchases in September, the Reserve Bank of Australia considered the fact that a number of central banks are tapering their bond purchases, and that its own bond purchase program is expanding at a faster rate relative to stock of bonds outstanding.

Based on this and with a view to provide clarity to markets, and after taking into account delay in economic recovery, the RBA decided to stick to taper decision of A$4 billion weekly pace but extend it to at least mid-February 2022.

The minutes of the September board meeting, published Tuesday, showed the RBA considered two options: One was to maintain bond-buying at A$5 billion a week until November and reviewing then, and the other was to taper at A$4 billion and extend it until mid-February 2022.

The RBA decided tapering remained an appropriate option given that the economy was expected to return to its pre-Delta path by mid-2022.

“The Board also saw value in providing greater clarity regarding bond purchases after November 2021,” the minutes said.

The RBA described the decision to extend A$4 billion purchases until mid-February 2022 as a “modification” and said it was done because “progress towards the Bank's goals was likely to take longer and was less assured” because of the Delta outbreak.

The minutes noted that some central banks in advanced economies had reduced their highly stimulatory policy settings or signalled they would soon start doing so. It cited examples of Bank of Korea and Reserve Bank of New Zealand. It also noted that market pricing implied Bank of Canada and the Bank of England were expected to start increasing their policy rates around mid-2022, and both these central banks were widely expected to end net asset purchases by that time.

In case of the Federal Reserve, the RBA said most members of the Federal Open Market Committee had indicated that a reduction in the pace asset purchases was likely to be appropriate before the end of the year, given the progress that had been made towards its macroeconomic goals. But it also pointed to market pricing that suggested that the conditions the Fed had set itself for raising its policy rate were unlikely to be met before 2023.

Interestingly, at the board meeting the RBA reviewed its Term Funding Facility and noted that the banks’ task of refinancing the maturing funding from the TFF in around three years' time would be sizeable, but manageable.

“Australian banks had issued similarly large volumes of bonds as a share of assets in the past, and currently have the capacity to smooth their funding arrangements,” the RBA said.

Another interesting discussion at the board meeting was the current arrangements for Exceptional Liquidity Assistance to illiquid but solvent banks, which is a core responsibility of central banks.

The RBA said it would publish information on its website regarding technical requirements and other considerations for ELA, in order to increase the transparency of ELA arrangements.

“This information will note the Bank's expectation that entities should: inform their regulator of any liquidity concerns and their intention to request ELA before approaching the Bank; have made reasonable efforts to obtain liquidity from the private sector; and be able to demonstrate their solvency,” the RBA said.

--Contact: Sophia@centralbankintel.com