RBA Discontinues Bond Purchase Program

Australia’s central bank decided to scrap its bond purchase programme citing faster-than-expected improvement towards the inflation goal and strengthening labor market conditions.

The policy board of the Reserve Bank of Australia headed by Governor Philip Lowe decided to cease the further purchases under the bond purchase program, with the final purchases to take place on February 10.

The board will consider the issue of the reinvestment of the proceeds of future bond maturities at its meeting in May.

The board also decided to leave its cash rate unchanged at a record low of 0.10 percent.

Lowe said the faster-than-expected progress has been made towards the RBA’s goals and further progress is likely. In these circumstances, the board judged that now was the right time to end the bond purchase program.

Further, the governor said ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates.

He repeated that the bank will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target band.

The bank lifted its inflation forecast amid higher petrol prices and the disruptions to global supply chains.

Underlying inflation is expected to increase further in coming quarters to around 3.25 percent, before declining to around 2.75 percent over 2023 as the supply-side problems are resolved and consumption patterns normalize.

Although the Omicron outbreak has not derailed the economic recovery, the bank lowered its growth projections. The forecast for GDP growth for 2022 was downgraded to 4.25 percent from 5.5 percent and for 2023 to 2.0 percent from 2.5 percent.

The RBA forecast the unemployment rate to fall below 4 percent later in the year and to be around 3.75 percent at the end of 2023.

A further pick-up in wages growth is expected as the labor market tightens, the bank said. This pick-up is still expected to be only gradual, although there is uncertainty about the behavior of wages at historically low levels of unemployment.

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