Pressure to grow on RBA to exit QE entirely by February

If the Fed moves to taper more rapidly, it will put pressure on other central banks, including the RBA, to follow.

Federal Reserve chairman Jerome Powell. Picture: AFP

Pressure is set to grow on the ­Reserve Bank to exit its government bond-buying program entirely by February, as other major central banks hasten the scaling back of their own bond purchases, while the Australian economy surges back to life through the fourth quarter.

Warnings this week by US Federal Reserve chairman Jerome Powell about the risk that US inflation pressures prove to be more baked in have markets betting the Fed will scale down its quantitative easing program at a much faster than expected pace next year.

Powell said the central bank was prepared to quicken the pullback of its easy-money policies, opening the door to raising interest rates in the first half of next year, as it grapples with inflation and a potential new virus wave that could exacerbate supply-chain disruptions.

US inflation surged to 5 per cent in October from a year earlier, according to the Fed’s preferred gauge, amid strong demand for goods and services that have faced supply-chain bottlenecks associated with reopening the economy from the pandemic.

If the Fed moves to taper more rapidly, it will put pressure on other central banks, including the RBA, to follow the example.

As the Fed sounds less patient, Australia’s economy is also looking more resilient.

Third-quarter GDP data on Wednesday showed the economy contracted 1.9 per cent in the quarter. It was a weak number, but it easily beat market and government expectations of something far worse.

The GDP data also revealed that three months of Delta-­induced lockdowns have left consumers with a mountain of unspent household savings to ­deploy just in time for the Christmas sales period.

To date, fourth-quarter economic data has suggested a rapid bounce in GDP growth, more than enough to fill the crater that resulted from the third quarter’s downturn, suggesting the economy could roar in 2022, much in the same way it did prior to the Delta lockdowns that crunched the economy in the third quarter.

Su-Lin Ong, chief economist at RBC Capital Markets in Sydney, estimates the risk of a complete withdrawal from QE in February by the RBA at 30 per cent.

The trajectory of the RBA’s policy path will be determined by the actions of other central banks, the functioning of the bond market and the pace at which the central bank achieves its goals for lower unemployment, higher wage growth and the return of ­inflation to the desired target of 2-3 per cent on year. According to those criteria, the probability of an earlier exit from QE by the RBA had grown, she said.

To be sure, the RBA has already started exiting alternative policy initiatives such as its three-year yield curve control target. It was forced to capitulate on the policy last month after a higher-than-expected inflation reading in the third quarter forced bond yields higher.

Still, the RBA could hesitate next year if the Omicron variant of Covid-19 casts a bigger shadow over the global economy.

RBA governor Philip Lowe might also fear that an accelerated exit from QE would further widen the current gulf between hugely hawkish money market bets on interest rates rising quickly next year, and the RBA’s more tempered guidance that it could be 2024 before it pulls the trigger on its first interest rate increase since 2010.

Paul Bloxham, chief economist at HSBC, said Australia’s economy was reopening faster than ­expected and that fourth-quarter data on retail sales and weekly employment data have beaten ­expectations. Forward-looking job market indicators, such as job vacancies, were also at high levels.

“We expect a strong rise in GDP in the fourth quarter, and now expect an earlier return to the pre-Delta level of GDP,” he said.

Still, with the Federal Reserve looking likely to up the pace on its QE tapering, Bloxham said the RBA would not exit QE fully, but would reduce its bond buying in February to $1bn a week, from the current pace of $4bn a week.

James Glynn covers Australian economics for the The Wall Street Journal

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