More Policy Changes From Major Central Banks

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ByJin Dao Tai

 NOV 13, 2021

Last week, two central banks carried out further changes to their monetary policy, putting them one step towards policy normalization.

Reserve Bank of Australia drops yield curve control

During the policy meeting last Tuesday, the Reserve Bank of Australia (RBA) held its cash rate unchanged at the record low level of 0.10%. The central bank will continue to purchase Australian government bonds at a weekly rate of A$4 billion until at least February 2022.

What has changed this time round is that the RBA has decided to discontinue its yield curve control (YCC). Specifically, the central bank will stop targeting the yield for April 2024 Australian Government bond at 0.10%. This decision was made amid the “improvement in the economy and the earlier-than-expected progress towards the inflation target”. Furthermore, since interest rates from the other markets are reacting to the rise in inflation and decline in unemployment, this renders the YCC ineffective.

RBA opens door to cash rate hike before 2024

Apart from dropping its YCC, the RBA has also made a delicate change to its rate hike timeline. Previously, the central bank has mentioned too many times that it will consider a rate hike only when inflation is sustainably achieved within its 2-3% target and this is unlikely to be achieved before 2024. But in the latest rate statement, the RBA revised its view, indicating that its central forecast for inflation will be for it to hit “no higher than 2.5% at the end of 2023”.

This slight change in tone implies that the RBA is now expecting the possibility of inflation rising to its targeted range of 2-3% in 2023 as opposed to the previous expectation. Hence, a rate hike in 2023 is now on the table.

Federal Reserve starts tapering this month

The second central bank that carried out a change in monetary policy is the U.S. Federal Reserve. Perhaps not a surprise since the market has been expecting the Fed to make a tapering announcement during their November meeting after sending a flurry of hawkish messages previously.

While holding its federal funds rate unchanged at the targeted range of 0-0.25%, the central bank announced the tapering of its massive monthly $120 billion bond buying programme starting with $15 billion ($10 billion of Treasury bonds and $5 billion of agency mortgage-backed securities) per month at the end of November and at the beginning of December. The Fed also mentioned that beyond December, tapering will continue at a similar rate but is ready to adjust the pace depending on the development of the economy. At the tapering rate of $15 billion per month, the Fed is expecting its quantitative easing (QE) programme to end by mid-2022.

Different understanding of “transitory”

During his press conference, Fed Chairman Jerome Powell said that there is different understanding to inflation being transitory coming from different people. He explained that the central bank’s definition of this term in the inflation context is that “if something is transitory it will not leave behind permanently – or very persistently higher – inflation”.

The Fed has amended its rate statement from the previous stance that elevated inflation “largely reflecting transitory factors” to “largely reflecting factors that are expected to be transitory”. Thus, the central bank has softened its tone towards inflation being transitory. On top of that, Powell also mentioned that the central bank is expecting the ongoing supply chain disruption and elevated inflation to last into next year before toning back down around mid-2022.

Starting QE does not imply imminent rate hike

While the start of QE tapering signifies that the Fed has progressed into the next stage towards policy normalization, the central bank’s Chief warned that this does not imply that a rate hike is underway. As part of the Fed’s dual mandate, the maximum employment goal has to be achieved before the consideration of a rate hike. And according to Powell, this goal is still far from being achieved.