Test ahead for RBA to maintain policy plans
Central banks love the “talk the talk but then walk away” when it comes to stimulus, according to Nikko Asset Management’s head of Australian fixed income, Darren Langer.
The Reserve Bank of Australia (RBA) said rates would be held at 0.1% for several years but would be unlikely to be cut any further or to reach negative territory. It had also implemented a $100 billion quantitative easing plan for the first time by buying government bonds to prop up the economy.
In a webcast, Langer said there were various tests the RBA, and other central banks globally, would face in the coming years if they wanted to stick to their plans.
“Central banks have been adamant they will not withdraw stimulus too quickly but we know that central banks love to talk the talk and then walk away very quickly if they think things are getting out of control,” Langer said.
“That will be a really big test for the RBA and the Fed, to be able to say if ‘if we withdraw stimulus too quickly then that will kill this thing dead’ and to take a step back.”
A big factor for the central bank’s decision would be the price of commodities which would affect inflation.
Chris Rands, fixed income portfolio manager, said that after a muted few months, commodity prices were beginning to rise especially for iron ore and copper. The price of crude oil was currently at US$48 ($65) per barrel, up from lows of $19 earlier in the year.
“Copper and iron ore are at their highest level since 2014 and this points to a global growth story. Oil is back at the price it was at in late 2019 and we are also starting to see agricultural commodities lift,” Rands said.
“Typically, when you get commodity prices running like that then this creates an inflationary cycle and if housing and commodities lift over the next 12 months then there is the risk of an inflationary spike late next year. If there is a spike by 3% to 4%, not wildly but enough to make us raise our eyebrows, then will the RBA think ‘enough is enough’ and decide to slow down?”
AUTHOR
Laura Dew
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