RBA to Extend QE Another A$100 Billion Over 6 Months, Westpac Says
Philip Lowe, governor of the Reserve Bank of Australia (RBA), attends a hearing before the House of Representatives economics committee in Canberra, Australia. (Photographer: Mark Graham/Bloomberg)

RBA to Extend QE Another A$100 Billion Over 6 Months, Westpac Says

The Reserve Bank of Australia will extend its quantitative easing program by purchasing another A$100 billion ($75.4 billion) of government securities over a further six months when its current package ends, Westpac Banking Corp.’s Bill Evans says.

The driving forces behind the extension -- despite a more positive growth and risk backdrop -- is other central banks expanding their balance sheets and the local currency heading toward 80 U.S. cents, Evans said in a research note Monday. The RBA will also “be mindful of the direct cost to Australian governments of rising bond rates” which he expects to climb next year.

Australian bonds pushed higher following the release of the report, with 10-year futures jumping 1.5 basis points before paring gains. The Australian dollar was little changed.

The new program is likely to be split into A$70 billion in federal paper and A$30 billion in state and territory securities, said Evans, chief economist at Westpac. “In 2022 we expect the RBA will reduce the QE program to A$50 billion per six months -- in two tranches -- and gradually raise the rate for the three year bond target through the year, reaching 0.3% by year’s end,” he said.

The RBA initiated a longer-dated QE program in November, when it also lowered the cash rate and its three-year yield curve control target to 0.10% as it sought to push down borrowing costs and cap the currency. Yet, the Australian dollar has appreciated more than 5% since the November meeting on news of a Covid-19 vaccine and renewed strength in iron ore prices.

The RBA’s balance sheet is currently 16% of GDP, but could lift to near 30% with future QE and drawdowns of its bank lending facility, Evans said. That compares with the U.S. (36%); Canada (24%); U.K. (not published since the second quarter of 2019 when it was 28%) and the European Central Bank (60%) at present, before allowing for future programs, he added.

“The RBA has been ‘late’ to the QE table,” Evans said. “Consequently, in terms of risking a ‘bloated’ balance sheet relative to other central banks the RBA is in good shape.”

Westpac recently lifted its forecast for Australia’s 2021 growth to 4%, resulting in unemployment being pulled down to 6% by the end of next year and 5.2% by end-2022. Evans said this raised the question of whether the brighter outlook might dissuade the RBA from extending its QE effort.

Yet, he says that the RBA is seeking unemployment below 6% in order to generate wage growth of 3–4% and that it has also discussed on numerous occasions the risk of withdrawing stimulus too early.

“The RBA would find it difficult to argue for the government maintaining stimulus and -- one month after the May budget -- withdrawing its own support by eliminating or even reducing its QE program,” Evans said.

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