By Gareth Aird, head of Australian economics at CBA:
Key Points
- The December 2021 Board Minutes are the last piece of communication from the RBA until the all-important February 2022 Board meeting, where the RBA will announce a decision on the bond buying program.
- The Minutes yesterday very clearly laid out the options the Board will consider on the future of the bond buying program at the February 2022 Board meeting.
- We expect upcoming labour market and inflation data to indicate better-than-expected progress has been made towards the RBA’s goals, which will be consistent with the cessation of the bond buying program in February 2022.
- The risk to the economy posed by the Omicron variant could shift the economic outlook, but that is not our central scenario. As such, we now expect the RBA to announce an end to the bond buying program at the February 2022 Board meeting.
- We reiterate our call for the RBA to commence normalising the cash rate in November 2022
RBA to end the bond buying program in February 2022 provided Omicron doesn’t alter the economic outlook
Today’s Board Minutes are the last piece of communication from the RBA until the all-important February 2022 Board meeting, where the RBA will announce a decision on the bond buying program. As such, the Board today used the Minutes to clearly articulate the options that will be considered on the bond buying program at the February meeting. They Minutes also provided the criteria against which the Board will assess the options.
The Board will consider three options on the bond buying program at the February 2022 Board meeting:
- reduce the pace of purchases from mid-February, with an expectation of a likely end point in May 2022;
- reduce the pace of purchases with a decision to review again in May 2022; and
- cease purchases altogether in mid-February.
The Minutes today noted that, “if better-than-expected progress towards the Board’s goals was made, then the third option (i.e. to cease bond purchases in mid-February) would become more appropriate”.
There are two key economic publications to come before the February 2022 Board meeting that will feed into the RBA’s decision on the bond buying program: (i) the December labour force survey (due 20 January); and (ii) the Q4 21 CPI (due 25 January).
We expect both pieces of data to print stronger than the RBA’s forecasts from the November 2021 Statement on Monetary Policy. That is, the data will indeed indicate that ‘better-than-expected progress towards the Board’s goals’ has been made.
As a result, we shift our call on the RBA’s bond buying program to them announcing at the February Board meeting an end to purchases altogether in mid-February 2022 (previously we had expected a taper to $A2bn per week and an end to the program in May 2022). This decision will be supported by the US FOMC’s announcement last week to double the pace of tapering, which means the FOMC’s bond purchase program will now end in March 2022 – see here.
The Omicron variant poses a risk to the economic outlook which could result in the RBA continuing to purchase bonds from mid-February through to May 2022. But for now that is a risk and not our central scenario.
The RBA Governor will also preview the RBA’s updated economic forecasts in his February 2022 post-meeting Statement. These updated forecasts will underpin the RBA’s narrative on the economic outlook in 2022. A big upside surprise on the Q4 21 trimmed mean CPI, which we anticipate relative to the RBA’s forecast profile, could see the RBA shift their rhetoric for inflation to lift only ‘gradually’. We will publish our point estimate for the Q4 21 CPI along with our full preview in mid-January.
This is the final note of 2021 from the Australian Economics team. I would like to wish all of our readers a happy and healthy Christmas and New Year.
