Australia Central Bank Sketches Out Scenarios for Bond Purchases

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(Bloomberg) — Australia’s central bank sketched out several scenarios for its quantitative easing program which is due to be decided at the July policy meeting, and also set parameters for extending its three-year government bond yield target.

The Reserve Bank’s options for longer-dated government bond purchases, set out in the minutes of the June policy meeting released Tuesday, include:

Ceasing purchasing bonds in September (other than to support the yield target if necessary)Repeating A$100 billion ($77 billion) of purchases for another six monthsScaling back the amount purchased or spreading the purchases over a longer period; andMoving to an approach where the pace of the bond purchases is reviewed more frequently, based on the flow of data and the economic outlook

A key factor in the decision would be progress on the bank’s goals for employment and inflation, and the likely impact on “overall financial conditions,” the RBA said. Given the program was “one of the factors underpinning the accommodative conditions necessary for the economic recovery, members thought it would be premature to consider ceasing the program.”

The Australian dollar declined after the release and was trading at 77.02 U.S. cents at 12:53 p.m. in Sydney.

The central bank is due to decide July 6 whether to undertake a third round of bond buying, or a modified version, when the current tranche ends. It will also make a call on rolling over its three-year yield target to the November 2024 bond from the current April 2024 maturity.

“The board had previously stated that it would not increase the cash rate until actual inflation is sustainably within the 2-3% target range,” the RBA said. “A key consideration for the decision regarding the yield target would be an assessment of the prospect of this condition being met some time in 2024.”

It said members also discussed “the likely effect of the decision in relation to the yield target on overall financial conditions.”

Economists expect the central bank will opt against rolling over the yield target bond and many see a modified version of QE being announced next month.

The RBA’s cash rate is currently 0.1%, the same level as the three-year yield target. It’s also running QE to try to keep a lid on the currency.

Australia has recovered strongly from Covid-19 as authorities managed to limit outbreaks to isolated flare ups. That’s boosted confidence, which combined with fiscal-monetary stimulus, has encouraged households to spend and firms to hire and invest. The economy has now recouped all of the jobs and output lost during the pandemic.

Yet that’s failed to translate into the faster wage growth needed to rekindle inflation. The board discussed spare capacity in the labor market at its meeting two weeks ago, noting that while the participation rate had risen to historic highs, further increases were possible.

“The number of people who were recorded as outside the labor force but open to work in the near future was still quite high,” it said. “Combined with other measures of potential labor supply currently classified as outside the labor force, this suggested there was still a pool of workers available to firms should the demand for labor continue to increase.”

Unemployment fell to 5.5% in April, having steadily declined from a pandemic peak of 7.4% last year. The RBA wants to drive it down toward 4% to trigger labor shortages and spark pay gains across the economy to revive inflation.

The bank said in the minutes that liaison with employers indicated labor shortages were appearing in some parts of the economy.

“However, firms facing labor shortages were citing a preference for non-wage measures to attract and retain staff, such as one-off bonuses and more flexible working arrangements,” it said. “Some firms were also opting to ration output because of labor shortages, rather than pay higher wages to attract new workers.”

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