(Bloomberg) — Any decision to end quantitative easing in Australia is separate from the timing of the next interest rate hike in the country, Reserve Bank Governor Philip Lowe said ahead of a formal review of the fate of its bond buying program.
The RBA is widely expected to further taper its QE program at its Feb. 1 meeting, though there is a heightened risk of purchases being scrapped altogether in light of a slew of strong economic data.
Figures released Thursday, after Lowe spoke, showed jobs growth surpassed all expectations sending unemployment down to 4.6% and bolstering the views of rate hawks.
Read More: Australia Jobs Soar as Lockdown Easings Unleash Wave of Hiring
“The bond purchase program can stop either in February or May and that has no implications for the timing of an increase in interest rates,” Lowe said in his last official outing of the year, held in Wagga Wagga, regional New South Wales, where the governor grew up.
Lowe’s comments came just hours after the Federal Reserve responded to accelerating inflation and strong economic data by doubling the pace of its tapering of asset buying and signaling a likely faster pace of interest rate rises in 2022.
When asked if the end of QE in Australia would herald the beginning of the RBA’s tightening cycle, Lowe said the two were “completely separable.” The governor reiterated that interest rates will not be raised from the current record low of 0.1% until actual inflation, not forecast, is sustainably within the central bank’s 2-3% target band.
Markets are already challenging Lowe’s view with swaps traders now seeing RBA raising its key rate to 1% within a year, from 0.1% now.
Three Choices
Lowe revealed that board members discussed three options for the future of the QE program at the RBA’s last meeting ahead of the February gathering.
- The first was to further taper from the current weekly rate of A$4 billion ($2.9 billion) with the expectation that buying will stop in May
- The second option was to taper and follow up with a second review in May
- The final option was to scrap the program altogether
“We have made no decision yet. Much will depend upon the news we receive between now and when we meet in February,” Lowe said, adding that the RBA’s forecasts were consistent with the first option.
The RBA board doesn’t meet in January, so it has time to asses the economy before making a final call on QE. By then, it will have a reading on fourth-quarter inflation, as well as labor market and retail sales reports for December.
Decisions of other central banks will also have an impact, Lowe said.
“We were very much influenced by the actions of other central banks. At the margin if they stopped doing this then it increases the probability that we will stop as well,” Lowe said. “But if we think it’s the right thing to keep going we will.”
While Lowe put a positive spin on the economy, noting that spending has bounced back quickly after virus lockdowns were lifted in the country’s populous east coast, he flagged the latest coronavirus variant as a reason for caution.
“The Omicron outbreak does, though, represent a downside risk and it is difficult to know how things will develop from here,” Lowe said.
(Adds comments from Lowe’s briefing.)
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