While the RBA did not reverse its QE taper decision announced back in July at its meeting this week, its response to the Delta crisis was to put bond-buying on autopilot until the summer months when the economy is expected to be back on track. As last week's national accounts showed, momentum in the Australian economy remained strong through the June quarter, but the emergence of Delta subsequently led to an abrupt deterioration in conditions on surging caseloads and widespread lockdowns. While Governor Philip Lowe's decision statement reflected the Board's sanguine assessment of the situation, with accelerating vaccination rates behind its expectation that this should be a case of recovery delayed not derailed, policy has been recalibrated in the interim.
With QE purchases reaching their targeted $200bn level ahead of the meeting, the Board this week adhered to its commitment given in July to start tapering the weekly run rate from $5bn to $4bn. Some sections (including myself) had thought that a delay to the taper would be forthcoming, but with the Board also announcing that the timing for the next review would be pushed back from November to February, it should make little difference either way. Delaying the next review until "at least mid February 2022" from mid November previously rules out another taper until well after the reopenings are expected and there is more clarity over conditions. As discussed in the review of Tuesday's decision, my calculations point to additional bond-buying through this period of $11bn relative to what markets may have been expecting in the absence of the Delta shock, where another taper may have occurred in November. Given the resistance to maintaining purchases at the $5bn weekly rate, it seems to me that the recalibration delivered this week is the framework for how further setbacks will be dealt with should the need for more RBA support arise. Importantly, there remains no change to the RBA's forward guidance on rates with the conditions for sustainable inflation between the 2-3%Y/Y target band not expected to materialise before 2024.
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Offshore this week the ECB's policy meeting was the highlight event. The Governing Council announced that the frontloading of purchases in the Pandemic Emergency Purchase Programme (PEPP) would end, reducing from a "significantly higher pace" to a "moderately lower pace", while all other policy settings remained unchanged. Since the decision was taken in March to accelerate the pace of PEPP purchases amid a significant setback in the econmic recovery, monthly purchases had averaged around €80bn compared to around €60bn in the early months of the year. But with the reopening and recovery regaining momentum, media reports quoting ECB sources indicate purchases in the range of €60-70bn per month will be sufficient to maintain favourable financing conditions. This is not really a taper in the sense that the PEPP envelope remains at €1,850bn — in fact, purchases will be in line with the level seen in August (see chart) — while its withdrawal date for not before the end of March next year is also intact.
Chart of the week
Markets do not expect the PEPP to be extended beyond that date and therein lies the key issue. The updated ECB staff forecasts presented this week showed that while the growth trajectory in the economy is robust — GDP for 2021 was revised up to 5.0% from 4.6% ahead of growth of 4.6% (-0.1ppt) in 2022 and then 2.1% in 2023 (unchanged) — inflation is expected to remain well short of its newly reformulated 2% target over the medium-term horizon. In the near term, inflation for 2021 was revised up to 2.2% (+0.3ppt) reflecting price pressures associated with the reopening but those factors are expected to be transitory with the pace fading over the more relevant period for policy in 2022 to 1.7% (+0.2ppt) and 1.5% (+0.1ppt) in 2023. With the end of PEPP nearing and significant support still required to drive inflation towards target, the ECB will need to come up with a response. At this stage, markets think the most likely way forward is a repurposing of the ECB's other QE program — the APP — but purchases there are currently only running at €20bn per month. Significantly elevating purchases in the APP could potentially see the ECB pushing up against its self-imposed rules on debt holdings of its member countries (an issue the PEPP has avoided due to its flexibility), while it would face resistance from the hawkish sections on the Governing Council. With much to work through, President Christine Lagarde gave little away at the post-meeting press conference other than to say the December meeting would be the time for these debates.
Over in the US, implications for the growth outlook amid the impact of Delta remained in focus. Highlighting these concerns was the Federal Reserve's Beige Book which noted that activity had "downshifted slightly to a moderate pace in early July through August". Areas including restaurants and bars, tourism and travel were reported as having been impacted by Delta in most Fed districts, while the other factor weighing on growth related to supply constraints for materials and labour. Labour demand remains very strong as job openings rose to a new record high at 10.9 million in July and is well in excess of the level of unemployment (8.4 million), suggesting that skills miss-matches are likely to at least be part of the story. Supply constraints continue to be reflected in elevated producer prices, with the Y/Y rate on the PPI rising to its highest on record at 8.3% in August. Both goods (1.0%) and services (0.7%) recorded strong rises in the month, indicating ahead of next week's key CPI data that price pressures remain in the pipeline.
