CBA: RBA bond buying to extend to May 2022

By Gareth Aird, head of Australian economics at CBA

Key Points

  • The RBA will take a more flexible approach to bond buying (QE) from early September when bond purchases will be at the reduced rate of $A4bn a week until at least mid‑November (as compared with the current pace of $A5bn per week).
  • The RBA Board will next review the rate of bond purchases at the November Board meeting.
  • We expect the RBA to announce a further taper at the November Board meeting and have pencilled in a rate of bond buying of $A3bn a week from mid‑November 2021 until mid‑February 2022.
  • Bond purchases are expected to continue through to May 2022, but at a further reduced rate.
  • Total bond purchases from mid‑November 2021 until mid‑May 2022 (i.e QE3) are expected to be a touch under $A100bn.
  • Our central scenario remains that the RBA will commence normalising the cash rate in November 2022.

The bond purchase program to be reviewed more frequently

The RBA’s decision from the July Board meeting to extend bond purchases from early September until mid‑November at a reduced rate of $A4bn per week was both a taper as well as a shift to take a more flexible approach to quantitative easing (QE).

CBA expected the RBA to taper bond purchases, but we thought it was a coin‑toss as to whether the taper would involve a more flexible approach to QE. In short, the more flexible approach the RBA has taken simply means committing to purchases for a shorter period of time. Reviewing the bond buying program more frequently will enable the RBA to recalibrate purchases to the flow of economic data and news.

The RBA has committed to next reviewing the bond buying program at the November Board meeting. In other words an announcement will be made on bond purchases on Tuesday 2 November 2021 (Melbourne Cup day).

In his press conference of 6 July RBA Governor Lowe stated, “the reviews of our bond purchases take into account: the effectiveness of the bond purchases to date; the decisions of other central banks; and, most importantly, progress towards our goals for inflation and employment. We will use this same framework in our future reviews.”

It is clear that the RBA considers the bond purchases to date to be effective. Therefore it is the second two points that are worth focusing on when thinking about future RBA decisions around bond buying.

(i) The decision of other central banks

The most important central bank in the world is the US Federal Reserve. By extension, the monetary policy decisions of the US Federal Reserve will have the largest bearing on the monetary policy decisions of the RBA.

We expect the US FOMC to announce at the September meeting that the Fed will taper its asset purchases from October. This means that when the RBA Board review the bond buying program in November we expect the Fed will by then be buying US Treasuries at a reduced pace. This will provide the RBA scope to further taper without putting upward pressure on the AU/US interest rate differential and by extension the exchange rate.

Of course it is not only the US Fed that matters. We expect a number of other central banks to be taking their foot off the monetary policy accelerator in Q4 21 (notably the Bank of Canada, who have almost finished tapering, and the RBNZ ‑ our colleagues at ASB expect the RBNZ to hike the OCR in November 2021).

(ii) Progress towards the goals of inflation and employment

The November Board meeting is four months away. The recent outbreak of COVID‑19 in Sydney and subsequent lockdown mean there is a considerable degree of uncertainty around the near term economic outlook. Notwithstanding, our working assumption is that the lockdown does not go on for an extended period. Will also expect that economic activity will bounce back quickly once restrictions are eased, as has previously been the case.

The leading indicators of labour demand are strong and we expect the unemployment rate to have a 4 handle on it at the time of November Board meeting (the September labour force survey will be published on 14 October). We forecast the trimmed mean CPI in Q3 21 to have accelerated to 1.7%/yr.

Put simply, at the time of the November Board meeting both the inflation and employment data is expected to show that progress has been made towards the goals of inflation and employment.

Our profile for the bond buying program

The RBA has committed to buying bonds from early September until mid‑November at a reduced pace of $4bn a week. This equates to $A40bn of QE over that period.

Our base case sees the RBA announce a further tapering of the bond buying program at the November Board meeting. More specifically we expect the RBA to announce they will buy $A3bn of bonds per week from mid‑November to mid‑February 2022, with a three week pause over the Christmas/New Year holiday period. This equates to an additional $A30bn of QE.

We expect the RBA to announce at the November Board meeting that they will further review the bond buying program at the February 2022 Board meeting.

Based on our economic forecasts we have pencilled in additional RBA bond buying from mid‑February to mid‑May at a further reduced based of $2bn per week. This equates to an additional $A26bn of QE.

We expect the RBA to announce at the May 2021 Board meeting that they will cease buying bonds from mid‑May. At that point we expect underlying inflation to be 2.0%/yr.

On our profile the RBA will have bought $A96bn of bonds under QE3.

There are of course risks. If lockdowns are ongoing and the economic expansion stalls over the next few months the RBA is likely not to taper again at the November Board meeting. But working the other way is the possibility that the economy is running hot by the early part of 2022 with a full rollout of the vaccine. Such an outcome could mean that the RBA opts to stop expanding the balance sheet earlier than we anticipate.

We will of course update our profile along the way if the data or news on COVID‑19 differs from our central scenario.

RBA to hike the cash rate in November 2022

Our profile on the cash rate target is unchanged. We expect the RBA to begin normalising monetary policy in late 2022. Picking the exact meeting that the RBA first hikes the cash rate is in many respects false precision. But our central scenario has the RBA delivering a first hike in the cash rate target in November 2022 ,ie. from 0.1% to 0.25%. We see the cash rate target at 0.5% at end‑2022 and then peaking at 1.25% by Q3 2023, the level which we asses to be neutral.

Our profile for the cash rate means that we expect the RBA to exit yield curve control before November 2022 – potentially in H1 2022 at the May Board meeting depending on the flow of economic data.

By mid‑2022 there is likely to be a euphoric mood amongst consumers and businesses as COVID‑related disruptions to day to day life are a thing of the past. We expect the Australian economy to be running at maximum capacity provided the Government has not shifted strategy to tighten fiscal policy. In summary, our forecasts for wages growth and inflation meet the conditions for a rate hike in late‑2022.

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Comments

  1. C'est de la folieMEMBER

    Our profile for the cash rate means that we expect the RBA to exit yield curve control before November 2022 – potentially in H1 2022 at the May Board meeting depending on the flow of economic data.

    By mid‑2022 there is likely to be a euphoric mood amongst consumers and businesses as COVID‑related disruptions to day to day life are a thing of the past. We expect the Australian economy to be running at maximum capacity provided the Government has not shifted strategy to tighten fiscal policy. In summary, our forecasts for wages growth and inflation meet the conditions for a rate hike in late‑2022.

    That is fine analysis but, gee, right at the end there are some optimistic assumptions in the mix. 

    That May 22 Board meeting is captive to the risk it is the first with a new government (or a reelected current government) with ‘policy bravery’ cojones tailored by the electorate in the form of working majority.

    That euphoria we may have consumers in by Early 22 is kind of weird.  It wont be like the euphoria we have had in days gone by.  There are a large number of people wondering what happens when government support, stimulus goes and just how ‘real’ a lot of the economy is at the moment.  Throw in a fairly plausible case for iron ore to be somewhere south of where it currently is then one of my thoughts is that we will have an economy where some parts (those best shielded) will be potentially euphoric, but a very large number of casualised people working in the hospitality, retail, university and government driven sectors (particularly through employment agencies in the form of short term contracts) are potentially going to be experiencing palpitations.

    One also wonders – seeing as both the Government and opposition seem to be reluctant to call the Population Ponzi for what it is and state overtly it is time for Australia to move on from population quantitiative easing (quite the opposite – I get the impression both sides cant wait for it to resume) any income increases in the short term may default back to flatlining if the Population Ponzi resumes.

    Of course should an election deliver

    a.    a minority government
    b.    a government captive to a strongly conservative mindset on its backbench
    c.     a government committed to opening the borders in the face of widespread disenchantment with the population ponzi
    d.    a load of crossbenchers who need to be negotiated with by anyone looking for policy
    e.    a government more focussed on social issues than economic policy

    …then I wouldn’t have thought it impossible for bond buying to continue for quite some time beyond mid next year.

    And that’s before we have any prospect of China trying to punch us in the economic cojones some more

    …….Or a Covid outbreak (s) getting out of hand
    …….or a new variant
    …….or ongoing coq ups vis vaccines

    And of course if any significant portion of the economic world happen to wake up to the idea we are in the midst a massive deflationary event bought on by years of juiced markets flavoured with massively indebted punters across the developed world, or some form of spectacular malinvestments elsewhere ………

    Then we might expect some more bond buying all round off the back of anything like that – including from the RBA.

  2. Jumping jack flash

    “By mid‑2022 there is likely to be a euphoric mood amongst consumers and businesses as COVID‑related disruptions to day to day life are a thing of the past. We expect the Australian economy to be running at maximum capacity provided the Government has not shifted strategy to tighten fiscal policy. In summary, our forecasts for wages growth and inflation meet the conditions for a rate hike in late‑2022.”

    Rainbows and lollipops! Higher CPI, and wage inflation here we come, paving the way for a rate hike without destroying our debt economy! Mission Accomplished!

    Of course this totally depends on whether Scomo’s joke of a stimulus pays off. I believe it won’t. It just wasn’t a big enough effort and it was poorly communicated to businesses to pass it onto their workers. This total failure at stimulus, plus if migrant slaves are brought back online, will mean that we may as well not have even had the stimulus because conditions will return quickly to the deflation of 2019 instead of powering up to infinity and beyond on the back of a monumental and self-sustaining debt surge.

    If we do get some inflation as they forecast, then I believe it won’t have much to do with Scomo’s failed stimulus effort, it will be probably due to the trillions of US stimulus spending getting diverted to us through China as US people gorge themselves on Chinese made products, but history shows that miners [and wage thieves] can’t support the economy as much as it needs to be supported with regards to nonproductive debt growth, which is the foundation of our economy. We need all the workers to get on board too and grow their debt.