The Reserve Bank of Australia’s extraordinary $350 billion bond buying program will likely start being wound back at the bank’s February board meeting and finish in May, governor Philip Lowe said.
But the emergence of the omicron COVID-19 variant represents a significant “downside risk” to Australia’s strong economic outlook, and therefore the future of the RBA’s monetary stimulus program.
Addressing the CPA Australia Riverina Forum on Thursday morning in Wagga Wagga – where the governor grew up – Dr Lowe said the future of the bank’s monetary stimulus policies would be determined by three factors.
These were “the actions of other central banks, how the Australian bond market is functioning and, most importantly, the actual and expected progress towards the goals of full employment and inflation”.
He outlined three potential scenarios for the new year.
First, tapering the $4 billion weekly bond purchases and terminating the program in May; second, tapering the program but with a review in May; and third, terminating the program altogether from February.
“We have made no decision yet. Much will depend upon the news we receive between now and when we meet in February,” Dr Lowe said.
The first option was “broadly consistent with the bank’s forecasts in November for employment and inflation”, but all three options were based on the premise the economy did not experience another serious setback.
“The omicron outbreak does … represent a downside risk, and it is difficult to know how things will develop from here. But we do expect the positive momentum in the economy to be maintained through the summer.”
The US Federal Reserve on Wednesday night (AEDT) announced it would hasten tapering its asset buying program, which is now expected to end in early-2022, with three rate hikes to follow later in the year.
Dr Lowe said that while the RBA’s central scenario was for quantitative easing to end in May, it also expected the overnight cash rate to remain at the current record low 0.1 per cent until at least 2023.
“The condition for an increase in the cash rate will not be met next year. It is likely to take time for that condition to be met and the board is prepared to be patient,” he said.
The RBA has previously indicated it wants annual wages growth of 3 per cent-plus before being confident inflation was sustainably within the bank’s 2 per cent to 3 per cent target band.
Wages growth was 2.2 per cent in the year to September 30.
However, Dr Lowe moderated his language in a post-address Q&A session, saying wages growth would “probably have to be 3 per cent” and it was possible interest rate hikes could occur with wages growth below that level if productivity growth was also performing poorly.
“I really hope that doesn’t happen, but it is possible,” he said.
The governor reiterated his view inflation locally was very different to what was being experienced overseas in places such as the United States where the headline figure is running at 6.8 per cent.
Headline inflation in Australia is 3 per cent, and Dr Lowe said a big part of the difference was wages growth being persistently low due to Australia’s wage-setting process and a strong cost-control mindset among businesses.
“While aggregate wages growth has picked up recently, it has only returned to the low rates prevailing before the pandemic,” he said. “The expected pick-up in wages growth is forecast to be associated with a steady but gradual increase in inflation in underlying terms.”
The RBA’s central scenario is for the unemployment rate to reach 4.25 per cent by the end of 2022, and 4 per cent by the end of 2023.