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

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.

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