The RBA Board at today's meeting, its first in 2021, announced a $100bn expansion of its quantitive easing program, while it left all other policy settings unchanged, maintaining the 0.1% targets for the cash rate and 3-year Australian government bond yield and the 0.1% rate on Term Funding Facility drawings. The expansion of the QE (bond purchase program) was not unexpected, but the timing did surprise in that it came earlier than most (including myself) had anticipated. The reaction in the markets provided an indication of this with yields on 10-year maturities crunched from just above 1.17% into around 1.13% in trading just after the announcement eventually ending the session at 1.14%, while the Australian dollar has also traded well off the day's highs in response, currently around 0.7630 against the US dollar.
The RBA's bond purchase program commenced in November with an initial envelope of $100bn, focusing on the 5 to 10-year segment of the yield curve over the ensuing 6 months, incorporating purchases of Australian and state and territory government bonds in an '80/20' split. At a weekly run rate of $5bn, purchases had accumulated to $52bn and were on track to be completed by early to mid-April. With today's announcement, the Board has granted this facility with an additional $100bn of firepower against an improved but still tepid economic outlook, with the existing $5bn pace of purchases per week to be maintained. In the end, rather than waiting for more information, the Board has decided to remove all uncertainty by taking a proactive stance. Perhaps the effects of the global reflation dynamics in markets since it last met was enough to sway the Board to 'go early', with 1o year Australian government yields rising 22bps and the domestic currency lifting more than 3% against the US dollar over the period.
In today's decision statement from Governor Philip Lowe, the other key points were around the economic outlook. While there is optimism given the pace of the recovery so far, that was tempered by the length of the journey still ahead. Ahead of Friday's Statement on Monetary Policy, the governor outlined that the Bank has penciled in a 3.5% growth rate for the domestic economy in 2021 and 2022 — note this is actually a downgrade from 5.0% in 2021 and 4.0% in 2022 previously, but the key is that the 'starting point' is considerably more advanced than where the Bank had expected it to be back in November. The RBA had expected GDP would contract by 4% in 2020, though after the strong rebound in activity that occurred over the second half that is looking more likely to be a contraction of around 2%.
Meanwhile, the unemployment rate ended 2020 at 6.6% — well ahead of the 8% level forecast by the RBA — and is now expected to decline to 6% by the end of this year (down from 6.5% previously) and then fall a further 0.5ppt to end 2022 at 5.5% (6.0% previously). Even with this revised outlook, the governor noted "the economy is expected to operate with considerable spare capacity for some time to come". Reflecting this, both wage and inflationary pressures are forecast to remain subdued. Inflation in underlying terms is not expected to reach the lower 2% target for the next couple of years and conditions in the labour market are not anticipated to be tight enough to generate a materially higher pace of wages growth.
With this the case, the governor reiterated the Board's commitment to maintaining these very accommodative policy settings until such a time that it is much closer to meeting its employment and inflation objectives. The channels by which these current settings are working were highlighted as lowering financing costs, placing downward pressure on the currency, ensuring an ample supply of credit to assist in the pandemic recovery and boosting balance sheets of households and businesses. In his closing remarks, Governor Lowe noted that the Board does not anticipate the macro conditions will improve sufficiently enough such that it can meet its employment and inflation objectives "until 2024 at the earliest". This was a slight tweak in language with the Board's forward guidance previously stating that it did not expect to increase the cash rate "for at least 3 years".
