Dr Brendan Rynne, KPMG Chief Economist, comments on today’s RBA announcement
The RBA Board has announced it will continue with highly accommodative monetary policy settings in the near term, albeit with a couple of the monetary policy levers notched back a step, in line with a strengthening domestic economy.
The cash rate, as expected, has been maintained at 0.1 percent, and the main announcements are that the Quantitative Easing (QE) bond buying program will be tapered to a daily run rate of $4bn at the end of the current $100bn tranche (which is due to finish in October 2021) and that yield targeting has not been extended beyond April 2024.
Overall these changes are less dramatic than many financial market economists had anticipated, suggesting the RBA remains cautious regarding the sustainability of employment growth and higher inflation. In the October 2020 meeting the RBA Board noted that it wanted to place more weight on ‘actual, not forecast, inflation in its decision-making’, while it also indicated it was less worried about maintaining loose policy settings for too long and overshooting the inflation target and more concerned about tightening rates too early and not achieving the inflation target for a sustained period.
All of this suggests the RBA is going to be in the game of bond buying and QE for some time to come, even though its holding of Australian government securities has already increased by more than $150bn since the end of March 2020. While this seems like an enormous increase – which it is by our own historical standards – it pales into insignificance when compared to the US QE program.
The US Federal Reserve Bank is currently spending US$120bn (AUD160bn) per month in its QE program, which has seen its balance sheet expand from $4.3 trillion to $8.1 trillion between the beginning of March 2020 and the end of June 2021. The Federal Reserve Balance Sheet is now sized at about 42 percent of US GDP, whereas the RBA’s Balance Sheet is only about 26 percent of Australia’s GDP. So in comparative terms we still have some headroom in unconventional monetary policy, suggesting the continuation of our QE even at a tapered rate of AUD$4bn a week is more than reasonable.
The bigger questions in all of this are: when will the monetary expansion stop; when will the pull back in money supply start and what will it look like. The monetary taper in the US began about three years after its last QE instalment, with the taper resulting in the Federal Reserve Balance Sheet contracting by $750bn between August 2017 and August 2019 (or about 20 percent of the balance sheet expansion that occurred responding to the GFC).
If the Fed provides a guide to the RBA then we can expect not only monetary settings to stay loose for some time, but also the level of cash to also stay elevated for the near future – which itself will also help maintain downward pressure on interest rates for a protracted period.