(Bloomberg) -- The Reserve Bank of Australia's new quantitative easing program is set to close in on the Federal Reserve's when measured against the size of the economy, highlighting the scale of its latest stimulus effort.
The plan to buy A$100 billion ($71.9 billion) in bonds over six months kicks off with the RBA announcing it will purchase A$2 billion in federal government securities at Thursday's auction. Governor Philip Lowe said Tuesday he estimates the RBA's balance sheet will have almost tripled once purchases are completed by mid-2021, compared with the position at the start of this year.
Bill Evans, chief economist at Westpac Banking Corp., reckons the RBA's assets will swell to around A$550 billion, or 27.5% of gross domestic product. The Fed's balance sheet is sitting around 34% of GDP and most economists don't expect it to ramp up the pace of its asset purchases any time soon.
“The RBA will be very rapidly closing in on the Fed from a ‘standing start'!” Evans wrote in a note. He added that the RBA has also “certainly left open” the option of further QE.
The international backdrop is central to the RBA's decision to add longer-dated bonds purchase to its existing three-year yield-curve control plan. It seeks to narrow the differential with U.S. and other nations' longer-dated yields to discourage investors from pouring cash into Australia and driving up the currency.
Global Easing
Su-Lin Ong, head of Australian economic and fixed-income strategy at the Royal Bank of Canada, estimates that after accounting for RBA purchases, net issuance of Commonwealth and state government bonds available to private sector buyers could move into negative territory over the next six months.
“This will lend ongoing powerful support to the bond market,” she said.
The spread of Covid in Europe has prompted lockdowns across the continent and spurred the ECB to signal it's likely to deliver additional stimulus at its next meeting. The Bank of England is similarly expected to ramp up its QE today when new lockdown restrictions come into force. The U.S. is similarly suffering a spike in infections.
Phil Odonaghoe, an economist at Deutsche Bank AG, notes the “QE precedent globally suggests it is virtually impossible” the RBA will be able to simply end its program after six months.
“Our early expectation is that it will be replaced with another program, for another six months,” he said. “Assuming the first is successful, we assume for now the second will be smaller, and we would consider a tapered ‘QE Mark II' program as a measure of success.”
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