RBA Is Likely to Dismantle Elements of QE in July, Edwards Says
The Reserve Bank of Australia is likely to stick with its current yield target bond and scale back its quantitative easing as it takes “tactical” decisions at next month’s meeting, former board member John Edwards said.
“It’s something they’ve got to do at some point and things have gone far more favorably than their earlier forecasts,” said Edwards, now a senior fellow at the Lowy Institute. “My sense is they may take this opportunity to dismantle some of the elements of their structure” on longer-dated bond purchases.
Australia’s recovery has exceeded the central bank’s most optimistic forecasts to date as fiscal and monetary support combined with the suppression of Covid-19 left households and firms cashed up and confident.
That’s sparked a wave of spending and hiring that’s recouped the jobs lost during the pandemic and expanded the economy beyond its pre-virus level.
Against this backdrop, the RBA is due to decide at its July 6 meeting whether it needs to switch the three-year government bond it currently targets to the November 2024 maturity from April 2024. That would imply the bank won’t raise the benchmark interest rate until 2025, since the three-year target -- at 0.1% -- operates as a form of forward guidance for the cash rate.
“To commit to it really does lock them in a bit on the timing of moving the cash rate,” Edwards said of a moving to the later bond. “It’s an unnecessary risk because they can at any point between now and April ’24 announce an extension if things go unfavorably.”
Edwards, who was principal economic adviser to Prime Minister Paul Keating from 1991-94 and sat on the RBA board from 2011-16, said a surge in property prices fueled by very low borrowing costs might also factor into the decision.
“The evident switch to fixed-rate borrowing for home purchases is something the RBA wouldn’t really welcome,” he said. That provides another argument for not prolonging the three-year fixed-rate target, he added.
In terms of QE, Edwards reckons the RBA will want to keep the capacity and expectation that it’ll intervene if the 10-year yield moves so quickly and at such magnitude that it rekindles an appreciation of the Australian dollar.
Policy makers could simply restate a commitment to not let the 10-year yield get too far out of line with what the RBA would describe as the fundamentals rather than committing to another tranche of buying.
The current round of bond buying up to September is worth A$100 billion ($77.4 billion). It is due to make a decision on a third round at next month’s meeting.
Read more: RBA to Use QE as Stimulus Tool, Could Raise Rates in 2023: Poll
The RBA could also get some indirect help from U.S. policy makers in keeping the Aussie dollar in check, he indicated.
While the direction of Fed policy is still “completely unclear,” the Biden administration’s major Covid support program and two more policy packages of similar scale in the pipeline will require huge deficit increases, he said.
“Consequently there’ll be an expectation of further Fed purchases and lack of clarity about how that will play out in the market,” Edwards said. “But it could mean that the U.S. Treasury rates actually go up and the RBA is relieved of a bit of pressure on Australian yields.”
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