The Reserve Bank of Australia Board left all policy settings unchanged at today's meeting, with rates at 0.1% as well as maintaining the guidance that it will commence tapering QE purchases from $5bn to $4bn per week in early September. This was against the consensus (and my) expectation that the taper start date would be delayed in response to the deterioration in the near-term economic outlook associated with lockdowns either ongoing or recently completed to contain the delta variant. The domestic currency lifted by around 40bps to trade above US$0.74 on the back of this. Governor Philip Lowe's decision statement outlined that despite the forthcoming forecasts (due Friday) to show an expected contraction in GDP in the September quarter, the fundamental outlook is still positive as the Board believes that activity will rebound strongly, as it has in coming back from earlier lockdowns, supported by fiscal and monetary measures and increasing vaccinations.
It remains unclear the extent to which the 2021 growth forecast will be downgraded on Friday from its current 4.75% pace, though the 2022 forecast was lifted from 3.5% to 4.0%. Suggesting that the Board sees the current setbacks with the pandemic as a pause in the recovery, the statement later refers to the totality of the RBA's monetary support and notes that this leaves in place the settings for the "expected resumption of the economic expansion". However, it is not without consequence for the labour market with "some increase" in the unemployment rate expected due to the lockdowns, albeit with the much larger adjustment anticipated to be from weakness in hours worked. Standing at 4.9% currently, the unemployment rate is now expected to fall to 4.25% by the end of next year (from 4.5%) and then ease to 4% by the end of 2023.
The inflation outlook appears to be little changed, with the Governor outlining that the process of a stronger economy generating an uplift in wages growth sufficient to hold underlying CPI within the 2-3% target band was still years away. Last week, underlying inflation came in at 1.6%Y/Y in Q2 but it is only expected to tick higher to 1.75% by the end of next year and be at 2.25% in 2023. The major uncertainty here for the RBA is the pace at which a historically low unemployment rate will encourage faster wages growth.
All in all, the RBA appears confident that the current setback with the pandemic will fade and that the recent additions to fiscal support complement its current monetary policy stance. That being said, the risks to the outlook in the near term are considerable and the path towards a sustained reopening is still some time away. Even if the economy does rebound as the RBA expects, it still does not expect to be in a position where the macro conditions will justify rate hikes until 2024. The Governor included in his final paragraph that the Board will "maintain its flexible approach to the rate of bond purchases" and these decisions will be informed by the "economic conditions" and "health situation". That flexibility may yet be required.
