It was only four weeks ago when the Reserve Bank of Australia Board recalibrated its monetary policy stance to a much stronger-than-expected economic recovery in the first tentative steps towards dialing back emergency settings. But with the delta strain proving difficult to keep at bay — Sydney is set to be shut down until at least the end of the month and lockdowns have either or are affecting other major cities — an increasingly uncertain outlook may call for a revised playbook. Deferring the planned start date for tapering the RBA's bond purchases is likely to be announced in today's decision statement from Governor Philip Lowe (due at 2:30PM AEST). The statement should also provide some insight into the extent to which the RBA's forecasts may have been impacted by this latest setback with the pandemic, with greater detail to come at Friday's parliamentary testimony (9:00AM AEST) followed by the Bank's quarterly Statement on Monetary Policy (11:30AM AEST).
To recap, at the July meeting, interest rates were left unchanged at 0.1% as the Board decided to maintain the 3-year yield target at the April 2024 bond rather than extending it out to the November 2024 maturity, indicating that rate hikes aren't expected until sometime in 2024. It also announced plans to taper bond-buying from $5bn to $4bn per week when the second $100bn tranche of purchases is completed in early September. The meeting minutes would later reveal that this was a close-run call, with the Board acknowledging that with employment and inflation "well short" of its objectives, there was an argument to maintain the $5bn weekly pace. Since then, the worsening pandemic situation has meant that GDP is set to contract in the September quarter on the back of the lockdowns while uncertainty over the outlook has increased materially. Thus, it will be difficult for the RBA to maintain guidance leading policy towards a tighter stance, meaning that the Board will very likely delay the start of tapering by announcing that it intends to keep weekly purchases at $5bn beyond September. A case could be made for increasing the pace of bond-buying to $6bn per week as well as potentially announcing a review of its guidance on not extending the maturity of the yield target, but with little to no hard data at hand to gauge the impact of this latest pandemic setback the Board may want to wait before deciding if it wants to move in this direction.
One of the key developments to watch this week will be the degree to which the RBA's forecasts are revised. Going into the July meeting, the theme the RBA was keen to put forward was the transition underway in the economy from recovery to expansion. While that assessment still likely holds, it has clearly been dealt a setback with the GDP growth rate for 2021 (4.75%) in line for a downgrade amid an outlook that is now more uncertain and dependent on when lockdowns ease. That said, the economy was coming from a position of strength, tracking ahead of the RBA's 'upside' scenario outlined in the May quarterly statement — notably the unemployment rate wasn't forecast to reach its current level (4.9%) until later this year — and more fiscal support has since been added. Where it all lands will be interesting, but as has been the case for near on 18 months now all forecasts are at the hands of the pandemic requiring flexibility from monetary and fiscal policymakers alike.