Australia ends QE with murky future for $465 billion of assets

Bloomberg

Australia concluded its quantitative easing (QE) program, leaving the Reserve Bank with more than 40% of government bonds on issue and raising questions about what it will do with the pile of assets.
The RBA on Thursday conducted its final A$1.6 billion purchase of securities under a program that tripled its balance sheet to about A$650 billion ($465 billion). Indeed in 2021 it bought more than three times more debt than the government issued, the largest ratio across world’s six largest developed bond markets.
Governor Philip Lowe says the RBA will decide in May whether to reinvest the proceeds of maturing bonds. Even if it decides against reinvestment, analysts don’t expect a significant run-off in the near-term — known as quantitative tightening — given the first notable bond maturity isn’t until April 2023.
The RBA’s decision to turn to QE, having managed to avoid it over the preceding decade, suggests that it’s likely to turn to it again in the next crisis or recession. Lowe said last week that while the RBA held 60% of some lines of securities, the market could accommodate more purchases if needed.
Australia had resisted unorthodox policies until economic fallout from Covid-19 finally drained its remaining interest-rate ammunition. The RBA would go on to buy securities, run the yield target, provide forward guidance, lend cheaply to banks and finally in November 2020, undertake QE.
It was far from smooth sailing. Bond-market turmoil punctuated RBA’s efforts, from a flash crash in 10-year bonds to the yield target collapsing in the face of the biggest bond rout since the early 1990s. Yields are surging again as QE ends, after the RBA had to amend its forward guidance as the economy recovered much faster than expected.
Lowe has acknowledged there are lessons to learn. The RBA is reviewing the history of its yield target on the three-year government bond, which stood at 0.1%, the same as the cash rate. Meantime, forward guidance is now data-based, with policy makers no longer referring to dates for a potential hike.
Yet against a backdrop of Australia tipping into its first recession in 28-1/2 years, unorthodox policies helped. The job market is tightening quickly, confidence is holding up amid another virus outbreak and core inflation has returned to the RBA’s 2-3% target.
The RBA insists that ceasing bond purchases doesn’t mean a tightening of monetary policy. It maintains that the stock of bonds bought, not the flow, provides the economic support.
The end of QE has economists and markets focused on the likely timing of the first rate rise, with a majority seeing an August liftoff. Markets are more bullish, pricing in a June hike and cash rate of 1.5% in the first quarter of next year.