Dovish RBA ends bond buying

Australia’s central bank will end its bond buying program but will have a slow approach to increasing interest rates from record low levels.

In its first meeting for the year, the Reserve Bank of Australia signalled the end of the program colloquially known as quantitative easing.

The bank launched an unprecedented bond buying program in March 2020 amid concerns about the COVID-19 pandemic’s impact on the national economy.

That meant buying government bonds on secondary markets and targeting a medium term yield, or interest rate.

All of that is designed to create money and support economic activity.

Other central banks have stopped, or plan to stop, their bond buying programs.

In Australia, the RBA said it had tripled its balance sheet to $640 billion, giving an idea of exactly how much support was directed into the economy.

But a recent inflation reading of 3.5 per cent had led markets to speculate the RBA would tighten its policy settings.

That’s above the RBA’s target band of 2 per cent to 3 per cent.

In Perth it was even higher, at 5.7 per cent, according to the Australian Bureau of Statistics, the highest level since the introduction of the GST.

Nonetheless, there’s a view that the inflation might be temporary, and that underlying inflation (which excludes more volatile items) is within the bank’s target.

Today, the RBA said it would maintain supportive conditions, with the cash rate to stay at 0.1 per cent.

“Ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates,” the bank’s governor Philip Lowe said in a statement today. 

The inflation rate would have to be sustainably within the target band before a rise.

“While inflation has picked up, it is too early to conclude that it is sustainably within the target band. 

“There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved. 

“Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target.”

The board would be patient, he said.