Daily Commentary BY THE CURVE TEAM –

Daily Insights – QE vs Cash Rate Decision

22nd of September, 2021

RBA Minutes – QE vs. Cash Rate Decision

  • The RBA opted to proceed with a tapering of QE purchases to $4 billion a week until February instead of maintaining $5 billion a week until November.
  • They accounted for the fact that a number of other central banks are tapering their bond purchases” and that “the Bank’s bond purchase program is expanding faster relative to the stock of bonds outstanding than that of many other central banks”.
  • The factors that will determine decisions on QE tapering differ from the cash rate.
  • A key transmission effect from QE is the exchange rate, so if other countries are not doing QE to suppress their bond rates, there is less pressure for the RBA to continue with QE.
  • Forecasts for the economy remain relevant for QE decisions as well. The RBA cited that “the economy is expected to return to its pre-Delta path by mid 2022” as a justification for tapering QE.
  • Other central banks and forecasts will be much less relevant to a decision on the cash rate, with the RBA re-iterating that they need actual inflation to be well within the 2-3% target band rather than relying on forecasted inflation.
  • They also differentiated between the inflation and wage outcomes in Australia vs other countries, notably the US and New Zealand.
  • Even during the middle of the year when the economy was running hot, Australian inflation and wages remained much more subdued than countries like the US and New Zealand.
  • While inflation and wages remain suppressed, the cash rate will not change.
  • The full minutes are here: https://www.rba.gov.au/monetary-policy/rba-board-minutes/2021/2021-09-07.html

Josh Stewart

Associate - Money Markets