Australia’s central bank signaled on Tuesday its willingness to extend its bond purchase programme next month and laid out various options for the plan with the aim of meeting its goals of boosting employment and inflation.
Minutes of the Reserve Bank of Australia’s June policy meeting showed members discussed tapering and even ceasing its massive quantitative easing campaign when the current A$100 billion ($77 billion) round expires in September.
This is the first time the Reserve Bank of Australia laid out how it might revise its bond buying campaign. A final decision is due at its meeting on July 6. Whatever the RBA decides about the bond purchase programme, analysts expect it to keep the policy cash rate at a record low 0.1% for a long time to come.
“Observing that the bond purchase programme had been one of the factors underpinning the accommodative conditions necessary for the economic recovery, members thought it would be premature to consider ceasing the programme,” minutes of its June policy meeting showed.
Other options discussed included a third round of A$100 billion bond purchases for six months, scaling back the amount bought and spreading purchases over a longer period.
Moving to an approach where the pace of the purchases is reviewed more frequently based on the flow of data and economic outlook was also discussed.
The RBA did not provide any indication of preference. Economists are divided on the approach the central bank might adopt with some predicting another A$100 billion round and others forecasting a flexible programme.
“Key considerations for the decision in July would be the progress made towards the Board’s goals for employment and inflation and the likely effect of different options on overall financial conditions,” the minutes showed.
The RBA has said it would also consider the fate of its three-year yield target on July 6, currently pegged at 0.1%. Analysts strongly believe the RBA will not extend the target beyond the April 2024 bond. The central bank did not give any indication on whether it agreed with the market.
Investors will watch communications out of the RBA in the weeks ahead, starting with a speech from Governor Philip Lowe on Thursday. Assistant Governor Luci Ellis speaks at a conference on June 23 followed by a panel participation by Lowe on June 30.
“If the Board wants to push back on market pricing and speculation in the run up to July 6…there will be ample opportunity to do so in the coming weeks,” said RBC economist Su-Lin Ong.
The Australian dollar was a touch softer at $0.7711 as the minutes were seen as dovish.
SUBDUED WAGE GROWTH
In explaining the need for easy monetary policy, the RBA has said wage growth will need to be “sustainably above 3%” to help achieve its inflation target of 2% to 3%.
Core inflation was currently at an all-time low of 1.2%. Wage growth is running at just 1.5%, compared with 2% in Europe and nearly 3% for the United States.
The RBA expects wage pressures to remain subdued until 2024, at the earliest, despite strong growth in employment. Leading indicators of labour demand, such as job vacancies, point to further solid increases in employment in coming months.
Still, firms facing labour shortages were offering non-wage incentives to attract and retain staff such as one-off bonuses and more flexible working arrangements, the RBA said citing its liaison programme with businesses.
Some firms were also opting to ration output because of labour shortages rather than pay higher wages to attract new workers.
The minutes highlight “the RBA’s ongoing dovish views around inflation and wages, which suggest the RBA is in no hurry to follow the RBNZ and BoC flagging higher rates in 2022,” said NAB economist Taylor Nugent referring to the New Zealand and Canadian central banks.