QE Tapering Plan Will Go On (06 August 2021)

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Three days ago, the Reserve Bank of Australia (RBA) delivered a little surprise when it decided to stick with its quantitative easing (QE) plan announced back in July despite the recent spike in COVID cases in Australia. (Read more about the RBA monetary policy in this post) Details on why the central bank decides to proceed with its decision on QE tapering were provided during Governor Lowe testimony earlier today.

Lowe’s Testimony.

During his testimony before the House of Representatives Standing Committee on Economics, Governor Lowe said that the RBA has considered holding back its plan for QE tapering during the monetary policy meeting. However, the central bank’s positive projections on the economic growth for 2022 permitted the plan to continue. Lowe explained that “any additional bond purchases would have their maximum effect at that time and only a very small effect right now when the extra support is needed most.” Furthermore, he mentioned the RBA felt that fiscal policy would be more appropriate than monetary policy in terms of providing aid at the moment. Nonetheless, the flexible approach of its QE programme allows the central bank to make adjustments to the rate of bond purchases in response to any unexpected turn of events.

On the subject of the RBA cash rate, Lowe highlighted that the central bank will not be increasing cash rate until inflation is sustainably in the 2-3% range. He emphasised that the RBA needs to be confident that inflation will remain within the targeted range before any rate hike is considered. Finally, Lowe said that the condition for a rate hike “is not expected to be met before 2024”.

RBA economic projections.

 202120222023Australian GDP4.00 (4.75)4.25 (3.50)2.50 (N/A)CPI Inflation2.50 (1.75)1.75 (1.50)2.25 (N/A)Unemployment Rate5.00 (5.00)4.25 (4.50)4.00 (N/A)

*Figures shown in parentheses refers to projections from May 2021