Australia ends quantitative easing $465 billion in central bank assets are not known where to go

Australia ended quantitative easing, leaving the central bank with more than 40 percent of government bonds and questions about how it would dispose of the assets.

The RBA on Thursday executed the last A$1.6 billion bond purchase in its current program, which has tripled the size of its balance sheet to about A$650 billion ($465 billion). In fact, in 2021, it will buy more than three times the number of bonds issued by the government, the largest of the world's six largest bond markets.

President Philip Lowe said the bank would decide in May whether to reinvest the proceeds from bond maturity. Even if it decides not to reinvest, analysts don't expect a quantitative tightening in the near term, as the first peak maturity of central bank-held bonds won't come until April 2023.

The RBA's decision to resort to quantitative easing, which has avoided quantitative easing for the previous decade, suggests that it may reintroduce quantitative easing in the event of the next crisis or recession. Lowe said last week that while the central bank holds 60 percent of certain varieties of Treasuries, the market will be able to accommodate further purchases if necessary.

"They may be more inclined to implement bond-buying programs if necessary in the future," diana Mousina, a senior economist at Security Capital Investments, said of the bank's unconventional policies, which also include a 3-year bond yield target.

Australia resisted unconventional policies until the impact of Covid-19 on the economy depleted the remaining interest rate ammunition, culminating in quantitative easing measures in November 2020.

The process is far from smooth. From the flash crash of the 10-year Bond to the collapse of yield targets in the face of the biggest bond plunge since the early 1990s, the turmoil in the bond market has undermined the RBA's efforts. As the economy recovered much faster than expected, the RBA had to adjust its forward guidance before yields soared again as quantitative easing drew to a close.

Lowe has acknowledged that there are some lessons to be learned. The RBA is reviewing the history of its 3-year Treasury yield target, which is 0.1%, the same as the cash rate. At the same time, forward guidance is now data-based, with policymakers no longer mentioning a possible rate hike.

But unconventional policies have worked against the backdrop of Australia's economy mired in its first recession in 28-and-a-half years. The job market is tightening rapidly, confidence has held firm during another wave of the outbreak, and core inflation has returned to the RBA's target range of 2-3%.

Richard Holden, a professor of economics at the University of New South Wales Business School, said the policies were "very important in signaling to the market that the central bank is moving to avoid major economic consequences'".

The RBA insisted that stopping bond purchases did not mean monetary policy tightened. It still believes that buying stocks of bonds, not flows, will support the economy.

The end of quantitative easing has led economists and markets to focus on the timing of the first rate hike, most of which they expect in August. The market is more aggressive, reflecting the start of interest rate hikes in June and the expectation of a cash rate of 1.5% in the first quarter of next year.

This article originated from the financial world