MNI INSIGHT: Wage Weakness Spurred RBA QE Extension

The Reserve Bank of Australia's surprise decision earlier this month to prolong its bond-buying programme to February from November was particularly motivated by concerns that wage rises were stalling as fresh Covid outbreaks slowed recovery, MNI understands.

While the RBA confirmed it was cutting its weekly purchases from AUD5 billion to AUD4 billion, it extended them by three months after August labour market data showed a sharp drop in the participation rate and a fall in total hours worked of 66 million even as unemployment fell 1ppt to 4.5%.

By February, the RBA will have purchased AUD$275 billion in debt, and will hold around 35% of Australian government bonds on issue as well as 18% of state and territory bonds.

MARKET RATES VIEW OUT OF SYNC

Governor Philip Lowe has noted that market rate expectations for hikes next year or in early 2023 do not match the RBA's forward guidance, and said in a speech last week that he did not expect conditions for a rate rise – an inflation rate driven by wages growthand sustainably within the 2-3% target range – until 2024. The current OIS curve implies the cash rate will rise from its current record low 0.1% to around 25 basis points by the end of 2022, 60 basis points at the end of 2023 and close to 100 basis points at the end of 2024.

Lowe pointed to the differences between Australian economic conditions and those in countries moving towards tightening, and made clear that the RBA will not use interest rates as a tool to cool housing prices, which have increased around 20% in the last year and by 8% in key markets in the last quarter.

The RBA has said it expects the economy to contract by around 2% in the third quarter, and although a return to some growth is possible in the last quarter the bank does not see a recovery to pre-Delta levels until the second half of 2022.