Tapering bond buying consistent with forecasts, says Aussie central bank

SYDNEY • The Reserve Bank of Australia (RBA) said tapering its bond buying programme at the first meeting of next year and ending it next 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 next February if better-than-expected progress is made towards its employment and inflation goals, according to minutes of the Dec 7 meeting released yesterday.

The other option is to taper next February and review again next 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. Its final decision will be announced on Feb 1 at the first meeting of next year, giving policymakers time to assess the economy, with readings on inflation, the labour market and retail sales due in coming weeks.

The bank also said risks to the recovery from the Omicron variant of the coronavirus would be clearer by February. "Timely indicators suggested that economic activity, particularly household consumption, was recovering strongly... 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 last month and the unemployment rate tumbling to 4.6 per cent. Earlier this month, RBA governor Philip Lowe said any decision to end QE is separate from the timing of the first interest-rate hike, adding that the moves of other central banks will also have an impact.

The central bank reiterated yesterday 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 per cent 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 minutes said. "This is likely to take some time."

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

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 downside risk is the Omicron variant.

New South Wales state clocked a record 3,057 infections yesterday, 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. "The outlook for travel and education exports had improved somewhat on account of the international border reopening earlier than previously assumed," the minutes said.

"Education exports were expected to contribute to GDP (gross domestic product) growth over the coming years."

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