Australia Extends QE Program to Stay Inline With Global Peers

(Bloomberg) -- Australia's central bank will extend its quantitative easing program by a further A$100 billion ($76.2 billion) and doesn't expect to increase interest rates until 2024, following in the footsteps of global peers in moving to stamp out premature tapering speculation.

Governor Philip Lowe left the key rate and three-year yield target at 0.10%, the Reserve Bank said in a statement Tuesday. In addition to the QE program now extended beyond mid-April, the RBA also operates a bank lending facility.

“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range,” Lowe said. “For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labor market. The board does not expect these conditions to be met until 2024 at the earliest.”

The currency erased a 0.5% gain after the release to trade little changed at 76.27 U.S. cents at 4:25 p.m. in Sydney. Benchmark 10-year bond yields dropped as much as 8 basis points from their intraday high to as low as 1.11%.

Lowe's QE announcement reflects Australia's small stature in the global monetary marketplace, requiring it to remain in the slipstream of major central banks. If the RBA were to step outside that line, it would risk sending the currency soaring and damage exports and jobs.

“The market appeared to have been preparing for a taper signal,” said Alvin T. Tan, strategist at RBC Capital Markets in Hong Kong. “So the additional QE is definitely against those expectations.” He added that “the message was also more dovish.”

Australia is enjoying a V-shaped recovery as Covid-19 is all-but suppressed, boosting confidence and fueling spending and hiring. House prices have recovered and are set to strengthen further as buyers tap record low borrowing costs. Yet the economy was struggling to generate inflation even before the pandemic, and the rise in unemployment since then only makes that harder.

A key aim of the QE program is to restrain the currency, which has been fueled by Australia's better health situation and high commodity prices as well as massive offshore stimulus programs. The Aussie dollar has surged 33% since its March nadir of 55 U.S. cents.

Lowe said the RBA's additional purchases will be at the current rate of A$5 billion a week.

What Bloomberg Economics Says...

“The surprise earlier addition to the RBA's quantitative easing toolkit solidifies ongoing monetary policy support for the economy, and is likely, in our view, to place downward pressure on longer-term Australian yields.”

-- James McIntyre, economist

For the full note, click here

Federal Reserve chief Jerome Powell last week made clear the U.S. central bank is nowhere close to ending its massive support for the economy, while European policy makers are considering further bolstering their considerable stimulus programs.

The RBA's updated central scenario is for Australia's economy to grow by 3.5% over both 2021 and 2022. Gross domestic product is now expected to return to its end-2019 level by the middle of this year, Lowe said.

The central scenario is for unemployment to be around 6% at the end of this year and 5.5% at the end of 2022. The RBA had previously seen the jobless rate still around 6% at the end of next year.

The unemployment rate at the end of 2020 was 6.6%, down from a pandemic peak of 7.5%.

The governor said in his statement that an “important near-term issue” is how households and firms adjust to the tapering of some of the Covid support measures and “to what extent they will use their stronger balance sheets to support spending.” The government is due to wind up its wage subsidy program in March that could prompt job cuts and bankruptcies.

Iron ore, Australia's largest export, has surged due to Chinese demand as the world's second-largest economy rapidly recovers. While the metal has slipped in recent days, it's still trading around $150 a ton, levels last seen during a mining boom Down Under a decade ago.

The bonanza is unfolding despite tensions between Australia and China, with Beijing imposing restrictions on a number of exports from Down Under.

Today's meeting kicks off a series of RBA events after a seven-week hiatus. Lowe speaks Wednesday in Canberra and delivers testimony to lawmakers there on Friday, when the central bank also releases its quarterly economic update.

©2021 Bloomberg L.P.