Weekly Market Update (12 July 2021) – RBA adopts flexible QE tapering plan

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ByLCMS Traders FX Analysis Team

 JUL 12, 2021

(1) During their monetary policy meeting last Tuesday, the Reserve Bank of Australia (RBA) held interest rate unchanged at 0.10%. In regards to the bond purchase programme that is ending in early September, the central bank has extended the programme by 2 months at a tapered rate of A$4 billion a week from the previous A$5 billion a week. The next bond purchase review will be held during the November meeting. RBA Governor Lowe said during the press conference that the central bank wants to see annual inflation at 2% for several quarters in the near term and between 2-3% in the long run. He also highlighted the possibility of revising Australian’s economic forecasts upwards during the November’s meeting.

(2) In the released monetary policy meeting minutes, the Federal Reserve highlighted that various committee members expect quantitative easing (QE) tapering to begin earlier than previously anticipated. Several members were also concerned that longer-term inflation expectations may rise to inappropriate levels if upwards inflation pressure remains persistent. With the recent valuation pressures in the housing markets, several members also felt that it is beneficial to reduce the pace of purchase of mortgage-backed securities earlier than the purchase of Treasury bonds. Nonetheless, no details were provided in terms of when QE tapering will start.

(3) The European Central Bank (ECB) carried out their long-awaited policy review last Thursday. The latest policy states that the central bank will revise its inflation target to 2% and allowing it to overshoot, thus adopting a symmetrical approach. The ECB also highlighted that any temporary deviation in inflation from its 2% target is fine, but sustained deviation from target will require actions to be carried out. This new policy will allow the central bank to project a higher level of inflation, leading to a softer policy stance.

(4) The OPEC+ meeting that was postponed to last Monday was cancelled. The issue of UAE’s production baseline was not resolved. Although all members of the OPEC+ except the UAE have agreed to increase supply by 400,000 barrels-per-day from August to December, without the agreement from all members, the deal will not go through.