Australia's central bank says tapering bond buying programme next year is consistent with forecasts

SYDNEY (BLOOMBERG) - The Reserve Bank of Australia (RBA) said tapering its bond buying programme at the first meeting of 2022 and ending it in May is consistent with existing forecasts, as policymakers presented an upbeat view of the economy.

The RBA's board discussed two other options for quantitative easing (QE). First, it could cease purchases in February if better-than-expected progress is made towards its employment and inflation goals, according to minutes of the Dec 7 meeting released on Tuesday (Dec 21).

The other option is to taper in February and review again in May if progress is slower.

"These options reflected the expectation that the economy would continue to bounce back," the minutes said. "The emergence of the Omicron variant was a new source of uncertainty, but it was not expected to derail the recovery."

The RBA's debate comes against the backdrop of global counterparts accelerating their winding back of stimulus to counter mounting inflation pressures. The RBA's final decision will be announced Feb 1, the first meeting of 2022, giving policymakers time to asses the economy, with readings on inflation, the labour market and retail sales due in coming weeks.

The bank also said that risks to the recovery from the Omicron variant of the coronavirus would also be clearer by February. "Timely indicators suggested that economic activity, particularly household consumption, was recovering strongly," the minutes showed. "Leading indicators of labour demand pointed to a strong recovery in labour market conditions in coming months."

The board met before jobs data last week that showed record hiring in November and the unemployment rate tumbling to 4.6 per cent. Earlier this month, Governor Philip Lowe said any decision to end QE is separate from the timing of the first interest-rate hike, adding the moves of other central banks will also have an impact on what the RBA does with QE.

The central bank reiterated on Tuesday that rates will not be raised from the current record low of 0.1 per cent until actual inflation, not forecast, is sustainably within the central bank's 2 to 3 per cent target band.

"This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently," the RBA said in the minutes. "This is likely to take some time and the board is prepared to be patient."

The RBA faces a shifting tide on global monetary policy. The Federal Reserve last week announced plans to speed up its own taper and signalled a likely faster pace of rate rises in 2022.

Similar factors are playing out in Australia's A$2.1 trillion (S$2 trillion) economy, with jobs growth surpassing all expectations, consumer spending resurgent and business confidence strong. But inflation is still tepid, a major reason why the RBA has reiterated its lower-for-longer rates message. A downside risk is the Omicron variant which is spreading rapidly.

New South Wales, where Sydney is state capital, clocked a record 3,057 infections on Tuesday, up from 2,501 on Monday. The spike in cases come as state authorities press ahead with a rollback of virus restrictions.

Still, the bank maintained its upbeat tone, noting service industries were set to receive a boost. "The outlook for travel and education exports had improved somewhat on account of the international border reopening earlier than previously assumed," the minutes showed.

"Education exports were expected to contribute to GDP growth over the coming years."