MNI POLICY: QE NEEDED TO CONTAIN AUD, RBA'S LOWE

The Reserve Bank of Australia's decision to add another AUD100 billion in Quantitative Easing yesterday was largely motivated by the likelihood that if the central bank did not act, there "would be unwelcome upward pressure on the exchange rate" and the AUD.

RBA Governor Philip Lowe today explained the decision in a speech entitled "The Year Ahead" at the National Press Club in Canberra, and said that with other central banks recently announcing extensions to their own bond buying programs, any failure to act by the RBA would push the AUD higher.

At its board meeting yesterday, the RBA decided to extend its program of QE beyond the original expiry date in April and to purchase another AUD100 billion in Commonwealth and State Government bonds. Other policy settings, such as the record low official interest rate of 0.10% and the yield control program on shorter dated Government bonds, were unchanged.

In his speech today, Lowe said that in deciding to extend QE the RBA had considered three factors: "the effectiveness of the bond purchases, the decisions of other central banks, and most importantly, the outlook for inflation and jobs."

"With three month's experience now, it is clear that the bond purchase program has helped to lower interest rates and has meant that the Australian dollar is lower than it otherwise would have been," Lowe said.

"So, it has worked. Australia's government bond markets also continue to function well and the available evidence is that further purchases would not be a source of market dysfunction."

Lowe also outlined the RBA's 2021 outlook, giving forecasts which will be explained in more detail in the bank's Statement on Monetary Policy on Friday.

"Despite the positive economic news over recent months, we still have quite a way to go," Lowe said.

"There is still very substantial spare capacity in the Australian economy."

Even so, the RBA is upping many of its key forecasts.

Under its central scenario, GDP is expected to increase by 3½ per cent over both this year and 2022.

"Given the recovery we have seen so far, we are expecting the level of GDP to return to its end-2019 level by the middle of this year, which is 6 to 12 months earlier than we previously expected," Lowe said.

Unemployment, currently at 6.6%, was expected to reach 6% by the end of this year and around 5.25% by mid-2023.

Inflation, however, would continue to lag below the RBA's target band of between 2% and 3% for some time, with the central forecast for 2021 an inflation rate of 1.25%.

Along with slow wages growth this would be a significant reason why the bank sees official rates unchanged "for quite a while."

Yesterday's Board statement said rates were likely to remain at current levels until 2024 "at the earliest."