The RBA Board left its policy rate and QE purchases unchanged at this week's meeting as it delivered an upbeat assessment of Australia's post-lockdown recovery taking shape (reviewed here). Signs of rebounding household spending, tightening labour market conditions and a constructive outlook for business investment were cited as consistent with the economy returning to its pre-Delta trajectory in the first half next year. Ahead of the Delta shock, the RBA had commenced the QE taper process but the winter lockdowns prompted it to delay going any further than the modest reduction previously announced, from $5bn to $4bn per week. When the Board returns in 2022 the QE program will be reviewed in February where the options under consideration shape as a more accelerated taper (to say $1-2bn/wk) or to end new purchases.
The criteria guiding the decision will be the updated set of RBA staff economic forecasts that will be available at the February meeting, the taper schedules of other central banks and general bond market functioning. Governor Philip Lowe is due to speak next Thursday (16/12) and the minutes for the December meeting will be published a few days later (21/12), so more insights could come to hand before year end. However, under the stated criteria, the RBA appears to be giving itself optionality to end the new purchase phase in February if deemed appropriate to do so. A February stop on QE would have markets sensing they are on the right track with their expected start to the hiking cycle (second half of 2022), though the RBA presents a much more patient case with the required wage and inflation dynamics taking longer to build. However, Governor Lowe noted this week there is considerable uncertainty around the responsiveness of wages to low levels of unemployment in the current cycle and the reference to underlying inflation hitting the midpoint of the 2-3% target at the end of 2023 was removed from his latest statement. Also in Australia this week, national housing prices were confirmed to have risen by a further 5% through Q3 despite lockdown disruptions in major markets (reviewed here).
Moving offshore, inflation pressures in the US continued to rise as the headline CPI rate accelerated in November from 6.2% to 6.8%yr while the core rate elevated from 4.6% to 4.9%yr. These outcomes were in line with consensus estimates; perhaps a noteworthy development given this is a market well attuned to upside surprises on inflation. The underlying detail remained consistent with recent themes. Energy prices surged to 33.3%yr driven by high petrol prices (58.1%yr); durables inflation hit a record high (14.9%yr) reflecting very strong consumer demand; and services inflation (ex-energy) continued to rise (3.4%yr) in line with the pandemic recovery effort. Meanwhile, inflation in the housing components firmed, with owners' equivalent rent rising to 3.5%yr to be at its fastest since early 2017. An acceleration in the Federal Reserve's tapering schedule is widely expected to be announced at next week's meeting, with the reduction in monthly QE purchases likely to be increased from $15bn to in the order of $30bn. That would see purchases fading out by around March next year and would give the Fed the optionality to move more quickly towards raising rates should inflation pressures continue to persist.
Ahead of the ECB's meeting next week, discussions around potential options for smoothing 'cliff edge' effects from the end of the net purchase phase of the PEPP program (scheduled for March 2022) continue to be discussed. A Reuters story suggested that one plan under consideration was a temporary and time-limited boost to the regular QE program — the APP. Either a new envelope of purchases could be granted through the end of 2022, though the total would be "significantly lower" than the current pace of €80bn (across both PEPP and APP), or monthly APP purchases (€20bn) could be accelerated for a shorter period but then scale down as economic conditions improve. Another plan reported by Bloomberg indicated that more flexibility in the reinvestment of maturing PEPP purchases could be the preferred option. This would see an extension in the reinvestment period beyond 2023 and also expand the geographical allocation of bond buys. Also meeting next week is the Bank of England as uncertainty around the impact of the latest Covid wave on the economy amid the return of some public health measures is tempering expectations for the hiking cycle to commence. Although still seen as a close call, recent comments from MPC member Saunders, who had been in favour of tighter monetary policy, saying it might be advantageous to wait and see how the situation evolves potentially tilts the balance to no move next Thursday.
