Australia Scraps Bond Buying, Remains Patient on Cash Rate

(Bloomberg) -- Australia's central bank has signaled it'll remain at the dovish end of the global policy spectrum even as it ended one of its crisis-era tools.

The Aussie dollar and bond yields whipsawed as markets that had bet on accelerated interest-rate tightening digested Governor Philip Lowe's pledge to remain patient in assessing inflation.

Lowe, who announced a scrapping of the 15-month long quantitative easing program, said the move doesn't imply a “near-term increase in interest rates.”

With this latest messaging, he remains committed to keeping the brakes on the RBA's response to higher inflation, in contrast to other central banker who are already taking action to stem price growth or gearing up for it. These range from the U.S, to the U.K. and New Zealand.

The governor echoed his oft-repeated views that it'll take “some time yet” for Australian wages to rise to a pace that would keep inflation sustainably within his 2-3% target.

That's despite the RBA's own forecasts showing inflation breaching the upper end of the band and the jobless rate falling to levels typically considered to be full employment.

The Australian dollar down slumped 0.5% immediately after Lowe's statement before erasing the loss. The nation's main stock gauge climbed 0.5%.

Yields on benchmark three-year bonds dropped as much as 8 basis points on the news before trading up about 2 basis points at 1.33%. Swaps traders pushed back rate hike expectations and now see June as a certain bet. As recently as yesterday they had priced in the first move for May.

“The RBA delivered a dovish statement, continuing to emphasize patience with the onus remaining on wages growth to lift for it to be confident that inflation will be sustainably within target,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada.

“Perhaps five years of undershooting demands a greater confidence in mid-point inflation over a longer timeframe,” she added.

The RBA also provided headline forecasts in today's statement:

It sees GDP growth of around 4.25% over 2022 and 2% over 2023
The unemployment rate is expected to fall below 4% later in the year and to be around 3.75% at the end of 2023; and
Underlying inflation is seen accelerating further in coming quarters to around 3.25%, before slowing to around 2.75% over 2023

What Bloomberg Economics Says
The central bank “is sticking to its baseline view that the pickup in inflation will be ‘transitory' -- a clear divergence with the Federal Reserve, which retired the word. Supporting the RBA's view is sluggish wage growth, which it expects to continue.”
James McIntyre, economics.
For full note, click here

The RBA's balance sheet has more than tripled to around A$640 billion since the start of the pandemic. Lowe announced that the board would consider the reinvestment of proceeds of future bond maturities at its meeting in May.

RBC's Ong said the comment “added to the dovish tone” of the statement.

“Previous comments from Governor Lowe in November hinted at no reinvestment and, effectively, natural run off to see the balance sheet shrink and quantitative tightening,” she said. “This line suggests it is open to reinvestment and a stable balance sheet.”

The governor will have the opportunity to explain his outlook on Wednesday, when he delivers his first speech of the year. Two days later, the RBA releases its full suite of forecasts in its Statement on Monetary Policy.