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Australia’s central bank faces taper quandary as its peers remain on hold

THE RESERVE Bank of Australia is set to keep its key interest rate and three-year bond yield target at 0.10% on Tuesday. — REUTERS

AUSTRALIA ONLY recently started its quantitative easing (QE) program, yet the key question already confronting the central bank is when and how to taper bond purchases given the strong economic recovery.

The Reserve Bank of Australia (RBA) 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’s halfway through a six-month, A$100- billion ($76.3-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’s labor 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 surged 33% since its March nadir of 55 US cents.

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-needed boost 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.

House prices in major cities rose 0.7% in January, a report released Monday showed, while regional areas again outperformed, climbing 1.6%. The total value of new loan commitments for housing reached a record high in December, according to separate data.

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

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