RBA set to extend QE in July - Capital Economics
Australia & New Zealand Economics

RBA set to extend QE in July

Australia & New Zealand Economics Update
Written by Marcel Thieliant

The Reserve Bank of Australia upgraded its forecasts for GDP growth and inflation but reiterated that it is prepared to extend its asset purchases. We stick to our forecast of another $100bn extension in the Bank’s bond purchase program, though this would happen in July rather than in June.

  • The Reserve Bank of Australia upgraded its forecasts for GDP growth and inflation but reiterated that it is prepared to extend its asset purchases. We stick to our forecast of another $100bn extension in the Bank’s bond purchase program, though this would happen in July rather than in June.
  • The RBA’s decision to keep policy settings unchanged today was correctly anticipated by 24 out of 25 economists polled by Reuters. Instead, the focus was on the Bank’s revised forecasts. The Bank revised up its GDP growth forecast for 2021 from 4% to 4.75% while keeping its forecast for 2022 unchanged. This happened against a backdrop of “strong growth this year and next” in the global economy and a stronger than expected economic recovery at home.
  • With the unemployment rate falling far faster than the Bank had anticipated, it no longer noted that there was “considerable spare capacity” in the labour market and that “it will take time for the labour market to be tight enough to generate wage increases that are consistent with achieving the inflation target”. Indeed, the Bank revised down its forecast for the unemployment rate for end-2022 from 5.25% to 4.5%.
  • Even so, the Bank’s forecasts for the unemployment still leave it above its new estimate of the natural rate of 4% by end-2022, though we’ll have to wait for Friday’s “Statement on Monetary Policy” to see the unemployment forecast for mid-2023. What’s more, the Bank only made the most modest upward revisions to its inflation forecasts: it now expects underlying inflation of 2% by mid-2023 instead of its previous forecast of 1.75%. And while it no longer expects wage growth and inflation to remain “subdued for years”, the Bank expects any pick-up to be “only gradual and modest”.
  • Indeed, the Bank reiterated that it is “prepared to undertake further bond purchases to assist with progress towards the goal of full employment and inflation” and noted that it “places a high priority on a return to full employment”. The Bank noted that it will make a decision on the target bond for its 3-year yield target as well on a further extension of its bond purchase program at its July meeting, whereas we thought this could happen as early as June.
  • Given the still subdued outlook for inflation, we expect the Bank to extend its asset purchases by another $100bn in July, which would mean that they run until end-January. We suspect the Bank will announce a tapering of its purchases by the end of the year and stop them completely around the end of Q1 2022. We also expect the Bank to maintain the April 2024 bond for its 3-year yield target rather than switch to the November 2024 bond. Looking further ahead though, we are optimistic about the outlook for inflation and wage growth. (See Charts 1 & 2.) As such, we expect the Bank to hike interest rates in late-2023 rather than wait until 2024.

Chart 1: Consumer Prices (% y/y)

Chart 2: Underutilisation Rate & Wage Growth (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, RBA, Capital Economics


Marcel Thieliant, Senior Australia & New Zealand Economist, marcel.thieliant@capitaleconomics.com