(Bloomberg Opinion) — Australia has taken a small step toward dismantling part of the stimulus it unleashed to fight Covid-19. This is no rush for the exit by the Reserve Bank, once the envy of the world for presiding over a three-decade run without a recession. Interest rate increases are years away.
As financial markets and the global economy cratered last year, the RBA introduced several important measures: cutting rates to near zero, capping the yield on three-year government debt and embarking on quantitative easing. On Tuesday, the bank opted not to extend its yield control measures to a bond maturing in November 2024. The Reserve Bank also finessed its QE program, outlining plans to slow its bond purchases to A$4 billion ($3.03 billion) a week starting in September from A$5 billion currently. It will review the program in November. While Governor Philip Lowe lauded QE’s role in supporting the economy, he said that the RBA “is responding to the stronger-than-expected economic recovery and the improved outlook,” according to a statement.
These steps are hardly dramatic and ultra-easy money will be a fixture for the foreseeable future. The central bank reiterated that conditions probably won’t warrant a rate hike until 2024, the year after Lowe’s term expires. It wants to see inflation settle at the target of between 2% and 3% on a sustainable basis, and getting there would require faster wage growth. The RBA is much more dovish than its counterpart in New Zealand, which has projected rate hikes next year, and South Korea, where officials have flagged an increase in coming months. The Bank of Canada is halfway through its bond tapering, with the next step expected as early as this month.
The gentle recalibration of the RBA’s message suggests the economic emergency isn’t permanent, even as political leaders wrestle with Covid outbreaks that have locked down some metropolitan areas. Gross domestic product has surpassed pre-Covid levels, employment growth is pretty strong and vaccinations are proceeding, albeit at a much slower clip than other advanced economies.
It’s important to remember that a tiptoe toward an eventual exit is a long way from calling time. One powerful reason the RBA is proceeding very carefully is that officials were worried about a sluggish economy in the lead-up to the pandemic. While the emergency measures were born in the Covid era, the bank was already on the path to what would once have been considered unconventional policy. After years of doing nothing, the RBA cut rates toward zero in 2019, and officials began studying the implementation of extraordinary policy steps in the U.S., Europe and Japan.
As a legitimate monetary tool for global central banks, QE can live on comfortably for a while. That’s one lesson the Federal Reserve and European Central Bank can offer from prior crises. Now, rising benchmark rates in Mexico, Brazil and Russia are more surprising than any unusual measures central banks might be using. But these are outliers.
Like the Fed, the RBA thinks recent spurts in prices are largely temporary. The pickup in underlying inflation is likely to be modest. Lowe spent a lot of time the past few years worrying, like his counterparts around the world, that prices weren’t increasing fast enough. It’s a far cry from 1980, when he began working at the bank in his late teens after winning a scholarship that earned him a salary while studying for an economics degree. Then, markets were wrestling with truly high inflation. Jacking up rates to counter this scourge was the remedy of the era. Central banks knew how to crush inflation — and often ended up suppressing growth in the process.
The current task is to walk the fine line: Ensure inflation is climbing, but not too much. Scale back easing without tightening. A goldilocks exit just might get this economy back to its fairy-tale run.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.