Australia Central Bank Faces Taper Quandary as Peers Stand Pat

Australia only recently started its quantitative-easing program, yet the key question already confronting the central bank is when and how to taper bond purchases given the strong economic recovery.

TheReserve Bank of Australia is set to keep its key interest rate and three-year bond yield target at 0.10% Tuesday, when the board holds its first meeting of the year. It’shalfway through a six-month, A$100 billion ($76.6 billion) bond-buying program, and also is running a bank-lending facility as part of efforts to compress borrowing costs and contain the local currency.

The nation’slabor market is recovering, sentiment is strengthening and households are cashed up, even before taking into account record-low borrowing costs. Yet it’s too soon to begin winding down QE. Australia’s small stature in the global monetary marketplace means it risks a severe hit to exporters and jobs if it’s a first mover. Major global peers have crushed any expectations of tapering.

“The RBA’s challenge in 2021 will be how to balance a surging domestic economy against a global policy backdrop of extensive QE,” Bloomberg Economics’ James McIntyre said. “While the labor market heals, the RBA will find itself caught in a tug of war between house prices and the exchange rate.”

The Aussie dollar has already surged 34% since its March nadir of 55 U.S. cents.

Employment Rising

Australia has added more than 780,000 total jobs since June, as employment rose in six of the last seven months of 2020 and the jobless rate fell to 6.6% in December from July’s pandemic peak of 7.5%. Yet there are risks ahead as remaining government wage subsidies are set to expire in March, potentially triggering job cuts and bankruptcies.

The economy also has enjoyed some luck: China’s early exit from pandemic lockdown and rapid economic recovery has driven iron ore to highs last seen a decade ago, providing a much-neededboost to Australian government coffers. Meantime, the breaking of a drought means agriculture could make an outsized contribution to gross domestic product of as much as 0.4 percentage point this year, McIntyre estimates.

The housing market has proved resilient, with prices in major cities bouncing back as restrictions eased. Outside Sydney and Melbourne, regional markets have been aided by the switch to remote working and increased desire for space.

U.S. Federal Reserve chief Jerome Powell last week made clear the U.S. central bank is nowhere close to ending its massive support for the economy, while European policy makersare considering further bolstering their considerable stimulus programs. If Australia were to step out of line, it could send the local currency soaring.

For RBA Governor Philip Lowe, the months ahead will be a crucial test of his tenure, as Australia and the global economy adjust to the post-pandemic world.

— With assistance by Kevin Varley

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