Via Bill Evans at Westpac:
The Reserve Bank Board’s minutes for its December meeting emphasised that the Board is committed to substantial policy support for a considerable period.
The Minutes note that “Substantial policy support would therefore be required for a considerable period”.
Despite recent encouraging economic developments around the distribution of vaccines in both the US and UK and what the minutes refer to as “the recovery in the labour market was more advanced than expected” there remains significant caution with respect to the Board’s confidence in the recovery –“the unemployment rate had ticked up in recent months and broader measures of labour underutilisation remained high” – “there was still a significant amount of spare capacity in the labour market and this would remain a key policy challenge for some time”.
Overall, the sentiment from the Board is broadly unchanged, “the recovery was still expected to be uneven and protracted”.
A second outstanding theme in the minutes is the view on the housing market. The domestic housing market was described as “improving but uneven” and it was pointed out that “national housing prices had increased only a little since the outbreak of the pandemic”.
The decline in overseas migration had impacted the rental housing market with rents falling and “rental vacancy rates in inner city Sydney and Melbourne around their highest levels in many years”. There is some speculation that the authorities may see the need to slow the housing market in 2021 with some form of macro prudential policies.
Our view is that these record low rates will eventually move house prices to levels that will concern the authorities (particularly if confidence returns and the significant lift in new lending is not offset by rising repayments resulting in elevated levels of household debt) but that will be a story for 2023.
Yesterday we released our forecasts for the RBA’s approach to Quantitative Easing.
We expect that the current $100 billion program will be extended into a second $100 billion program before being reduced to two consecutive $50 billion programs that will see the policy covering both 2021 and 2022.
In fact, this coverage will fall a little short of the end 2022 date.
The current program which began on November 5 is described by the RBA as “approximately six months” would expire in late April/early May 2021.
We expect that will be immediately replaced by a second program of equal size and length taking the program to late October/early November 2021.
That program is expected to be replaced by a smaller, $50 billion, program of “approximately six months” to Late April/early May 2022; and finally, a fourth program to late October/early November 2022.
Two years of QE is unlikely to be currently priced into the curve but the approach set out in the December Minutes – “substantial policy support; considerable period”; “protracted recovery” all indicate that the RBA is certainly contemplating further QE.
In particular we are likely to hear more early in the new year as indicated by the Minutes, “Members agreed to keep the size of the bond purchase program under review”.