Australia's QE call shapes up as a cliffhanger with economists split

[SYDNEY] The Reserve Bank of Australia's (RBA) first meeting of 2022 is shaping up as a cliffhanger and leaving economists split over the fate of its bond-buying programme as the Omicron variant adds to the uncertainty.

8 of 14 economists expect the RBA will scrap quantitative easing (QE) at its Feb 1 meeting, a survey showed. The other 6, including Westpac Banking Corp's Bill Evans, see it scaling back from the current A$4 billion (S$3.9 billion) weekly pace and ending purchases in May.

The RBA, in minutes of its December meeting released Tuesday (Dec 21), said its current forecasts support tapering. The bank releases updated estimates in February.

The division among economists highlights the challenge for Australian policy makers, who will be deliberating against the backdrop of global peers quickly winding back stimulus to focus on inflation. Governor Philip Lowe also has to weigh the likelihood of stronger economic data translating into higher prices.

"The probability of the RBA ending its QE programme in February has increased," said Josh Williamson, a senior economist at Citigroup, whose base case is a taper. "The RBA's decision will hinge on the December labour force data, fourth-quarter CPI print and the impact of Omicron."

Australia's labour market is booming, with the economy adding a record 366,100 jobs in November and unemployment tumbling to 4.6 per cent from 5.2 per cent after the lifting of virus restrictions.

That is a positive for Lowe, who is trying to drive the jobless rate down to 4 per cent to unleash wage growth and rekindle inflation. Yet the governor is sceptical that broad-based price increases will emerge quickly and has dismissed market bets the RBA will begin raising interest rates from mid-2022.

Australia's central bank is an outlier in expecting to be on hold until late 2023. The Federal Reserve has doubled the pace of its tapering and indicated it is likely to raise rates at a faster pace next year, and the Bank of England has already hiked.

It could be that Australian quarterly inflation data on Jan 25, 6 days before the RBA meeting, is pivotal to the decision. The more hawkish economists argue that the recovery is moving at such a speed that labour shortages and wage pressures currently in pockets of the economy are likely to spread fast.

The RBA said in Tuesday's minutes that a decision to end bond buying in February would require "better-than-expected progress towards the board's goals" on inflation and employment.

Some economists detected the RBA moving that way in the bullish tone it adopted yesterday.

"There's a clear signal in the minutes that they intend to end QE," said Gareth Aird at Commonwealth Bank of Australia, who switched from predicting tapering to QE ending on Tuesday. "They made it pretty clear in the minutes that unless Covid derails the economy they're going to finish the bond buying programme."

One key source of downside risk continues to be the coronavirus. Australia is battling record cases, with the most-populous state of New South Wales at the center of the surge. Yet authorities are pressing ahead with a roll back of mobility restrictions.

That has made bond investors jittery. Aussie 3-year bonds rallied overnight, with traders cutting bets on RBA hikes for 2022 and now pricing in the first rate increase in July versus June just yesterday.

"There was too much priced in for the RBA," said Kellie Wood, a fixed income fund manager at Schroders Plc in Sydney. "And now uncertainty around the near-term outlook due to Omicron alongside skinny markets has pushed 3-year yields lower."

BLOOMBERG