RBA’s QE experiment approaches its end

Economists expect the Reserve Bank of Australia to end its historic $326 billion experiment with unconventional monetary stimulus, possibly as soon as next month, in an acknowledgement the economy will not be saddled with an omicron hangover.

The Australian Financial Review’s survey of 30 economists puts the first post-pandemic era rate increase in play by June 2023, according to the median forecast. However, nearly a third of respondents forecast a tightening as early as this year.

History shows central banks do not conduct quantitative easing, or QE, and tightening concurrently, as one policy is accommodative and the other restrictive. That means ending QE is a precursor to future interest rate rises.

“Pressure will build on the RBA to begin policy normalisation by late 2022 with a lift-off in Q1 2023 even if wages growth is not quite above 3 per cent,” said RBC Capital Markets chief economist Su-Lin Ong. “There will still be enough compelling reasons to begin normalisation by early 2023.”

The central bank insists it will not raise its cash rate until actual inflation is sustainably within the 2 per cent to 3 per cent target range. According to the bank’s central forecast, underlying inflation will reach 2.5 per cent in 2023. But economists disagree, seeing inflation accelerating from its current 2.1 per cent year-on-year to 2.44 per cent for the whole of 2022.

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