Australia Takes a Baby Step in From the Cold on QE

(Bloomberg Opinion) -- Australia's economy looks a bit less like an outpost of ultra-easy money. In ending quantitative easing, the central bank is inching closer to the global mainstream, a place from which it had become alarmingly distant.

The Reserve Bank of Australia said Tuesday it will end the bond purchases that buttressed markets and growth during the peak of the pandemic. The move was widely anticipated. Employment is robust and inflation is climbing. To stick with QE would have strained the bank's credibility.

It was keen to stress that this should not be seen as a curtain raiser to an imminent increase in the benchmark rate. Governor Philip Lowe said in a statement the RBA will be patient as it scrutinizes how inflation plays out. This is a tough sell. Most economists see at least a couple of hikes, beginning around midyear. It may not be long before Lowe begins to openly acknowledge what private sector economists have been saying for months: Policy settings are too loose and will have to change.

The central bank has itself spent the past few months crawling away from its previous insistence there would probably be no movement until 2024. That guidance had been watered down to throwing shade on this year. In a December speech, Lowe said he didn't foresee conditions that would warrant a move in 2022. Watch for a further erosion of that guidance. Absent from the RBA statement was prior language that wage growth would need to be “materially higher” for inflation to be sustainably within the 2% to 3% goal.

The monetary terrain beyond the country's shores has shifted dramatically since the RBA board meeting in early December; the group usually doesn't convene in January, when most Australians decamp to the beach. The Federal Reserve is expected to raise its main rate in March and economists appear to be racing to see who can project the most nudges higher this year. Bank of America Corp. projects seven hikes, one at each meeting of the Federal Open Market Committee, an idea that would have seemed outlandish a few months ago. Goldman Sachs Group Inc. flags five quarter-point moves.

Every monetary authority will insist it doesn't? automatically follow the Fed, but many swim in the same direction. The Fed itself was saying for much of 2021 that there would be a decent interlude between ending QE in the U.S. and the start of hikes. As inflation surged, that commitment went out the window. Borrowing costs have been lifted in the U.K., New Zealand, South Korea, Norway and Mexico. Policy has been tightened in Singapore. Rate hikes have been foreshadowed in Canada and Indonesia. How special is Australia, really?

When too-low inflation was seen as a great affliction, Lowe was in the vanguard of policy makers around the world who said they wanted to see actual inflation, not just forecasts that saw price increases accelerate. He has it now: Consumer prices rose 2.6% in the fourth quarter, crossing the midpoint of the bank's target area. The jobless rate has tumbled to a 13-year low of 4.2%.

Lowe has said he prefers to see inflation in the comfort zone, not just falling over the line. “While inflation has picked up, it is too early to conclude that it is sustainably within the target band,” he said Tuesday. “There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved.”

The RBA does have some things going for it. While inflation has quickened, it's not well in excess of the target. But for a bank that says it watches its counterparts closely, the RBA nevertheless seems out of sorts. Given the strength of the local economy, it's doubtful that isolation is a long-term solution.

More From This Writer and Others at Bloomberg Opinion:

A Big Change Is Afoot. It's Not Just a Rate Hike: Daniel Moss
Ending High Inflation Won't Be Pretty: Abramowicz and Authers
BOE Has More Than Rate Increases to Worry About: Marcus Ashworth

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.