AFR's John Kehoe confirms RBA's QE3 will likely be $135bn or more

Christopher Joye

Coolabah Capital

In line with our analysis earlier in the week, the AFR's Economics Editor, John Kehoe, far and away the most accurate and precise RBA media conduit, has today confirmed the details of the RBA's expected QE3 program. In a major scoop, Kehoe writes:

The second and arguably more important decision the RBA will make in July is on the future of its $200 billion government bond buying program.
More bond purchases are coming, it’s just a matter of the precise quantities and over what time frame...
Last November the bank committed to an initial $100 billion of quantitative easing over five months and later doubled down on another $100 billion from April this year for the next five months.
Beyond September, the $5 billion-a-week run rate could be retained initially and later incrementally reduced if the economic circumstances warrant it.
The size of the bond purchases could be periodically reviewed, say, every quarter or so, and gradually reduced before ending, perhaps later next year if enough progress towards the bank’s goals has been made.
Hypothetically and by way of example, let’s imagine the bank presets the dollar amount of bond purchases at $5 billion a week for the three months to December. Before Christmas, it could preset the next quarterly amount through to March. This would cover the Christmas-New Year period. The bank is not scheduled to hold a monthly board meeting in January...
Lowe had made clear his chief focus will be progress on achieving full employment somewhere below 5 per cent to generate wages growth above 3 per cent...
The RBA will need to consider moves by other central banks because this will impact the value of the Australian dollar, a transmission mechanism for monetary policy.
The timetable for US Federal Reserve tapering will be important, with Fed policymakers signalling they will soon start to discuss winding back the $US120 billion monthly securities purchases.
Canada and New Zealand have signalled they will tighten policy well before 2024, but they are much closer to their targets. Stripping out short-term volatility due to COVID-19, Canada is around its 2 per cent inflation target. Unemployment is 4.7 per cent in New Zealand.
Hence, any RBA taper is likely to be slower than these two Commonwealth counterparts.
In explaining its exit path to traders, the RBA may want to emphasise that any tapering of government bond purchases is not a tightening of monetary policy.
Further bond purchases, even at a diminishing rate, would still be stepping on the accelerator, not tapping on the brakes.

As Kehoe notes, this is now the third time that he has communicated that markets should prepare for a $5bn/week QE3, which he revealed today will be reviewed quarterly. The quarterly review process is important because it avoids the spectre of markets having to price QE probabilities every single month.

The RBA is committing to $75bn of purchases in the first three months of QE3, the size of which will then be calibrated over time. Kehoe has made it clear that the RBA will be very slow and cautious with any tapering in 2022, and deliberately lag central banks like the Bank of Canada and the RBNZ given Australia's very different employment and inflation outcomes. It will also sensibly avoid getting ahead of the Fed's tapering, which is slated to take place over the duration of 2022.

Finally, the RBA is making it clear that QE3 will be "state-dependent", and prudently maintained until it hits its full employment target, equating to a jobless rate in the high 3% to low 4% territory. This is the same approach the Fed and other central banks have adopted.

It would seem there are two clear paths for the RBA in 2022 apropos QE3. The first would involve a relatively rapid tapering if the economic data surprises to upside. In this scenario, the RBA would scale-back its bond purchases from $5bn/week in the December quarter to $3bn/week in the March quarter and then finish with $1bn/week in the June quarter. This would size QE3 at $135bn in total, which is still much larger than most economist forecasts (save Westpac's Bill Evans who has consistently predicted a $150bn QE3/QE4 package). 

In an arguably more realistic scenario, the RBA would adopt a more cautious trajectory, reducing its purchases by $1bn/week each quarter. So it would drop to $4bn/week in the March quarter followed by $3bn/week in the June quarter and then $2bn/week and $1bn/week in the September and December quarters. This would size QE3 at $225bn.

Of course, none of this allows for big shocks, set-backs or any serious adversity. Both glide paths assume a relatively smooth transition back to full-employment. If the RBA faces any bona-fide shocks, it is easy to imagine it maintaining the quarterly run-rate at, say, $5bn/week or $4bn/week until the dislocation passes.

This is yet another case of the market, and many economists, underestimating the RBA's commitment to restoring sustainable full employment and inflation within its target band. It demonstrates that the RBA is really sticking to its "nowcasting" paradigm, and avoiding falling into the trap of overestimating wages and inflation based on rubbery forecasts.  

Interestingly, both Westpac's Bill Evans and ANZ's David Plank announced today new QE3 forecasts that embraced an open-ended, $5bn/week solution (as Coolabah had flagged earlier in the week) that is reviewed quarterly and state-dependent, demonstrating the power of the RBA's conditioning via the AFR's Economics Editor.

Access Coolabah's intellectual edge

With the biggest team in investment-grade Australian fixed-income and over $6 billion in FUM, Coolabah Capital Investments publishes unique insights and research on markets and macroeconomics from around the world overlaid leveraging its 13 analysts and 5 portfolio managers. Click the ‘CONTACT’ button below to get in touch.

Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting Neither Coolabah Capital Investments Pty Ltd, EQT Responsible Entity Services Ltd (ACN 101 103 011), Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Institutional Investments Pty Ltd holds Australian Financial Services Licence No. 482238 and is an authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271. Equity Trustees Ltd that holds Australian Financial Services Licence No. 240975. Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

2 topics

Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.