Having elected to retain its previously announced tapering timeline at the August meeting, the RBA Board will be revisiting that decision at today's September meeting (due at 2:30pm AEST), while all other settings are expected to remain unchanged. Total purchases in the Bank's QE program reached $200bn yesterday — the level at which the Board has said will see the pace of purchases tapered from $5bn to $4bn per week (chart below). That guidance was first announced back in July and then reaffirmed in August where the Board held the line against a deteriorating outlook due to the Sydney lockdown. RBA forecasts were factoring in a contraction of "at least 1%" in Q3 GDP; however, the tapering guidance was retained in recognition of the stronger-than-expected pace of the recovery and its strong outlook for 2022.
In the August meeting minutes it was noted that the QE program would remain responsive to the "...economic conditions and the health situation" and that in the event of a "more significant setback" for the recovery, the Board would be "prepared to act". Since that meeting, things have worsened materially, with the spread of Delta sending around 60% of the population into lockdown across New South Wales, Victoria and the ACT. An accelerating vaccination program will encourage the RBA in assessing future prospects, but the authorities have made it clear that the attainment of the 70-80% vaccination rates targeted by the National Cabinet will determine when the current restrictions profile eases, and that is not likely to occur until well into Q4. Compared to the forecasts the Board was presented with in August, a much more severe economic contraction is now likely in Q3 as a result of the broader and longer lockdowns, with market forecasts and high-frequency indicators suggesting this will be in the order of -3%.
Important to note is that with the second $100bn tranche of purchases completed, the RBA's operation of the QE program shifts from a quantity target to a more flexible approach, where the pace of purchases responds to changes in the underlying conditions and is reviewed periodically. In light of this, the deterioration on the economic and health fronts since the previous meeting argues for the RBA's policy guidance to be recalibrated to these developments by delaying the taper. As with other central banks, the RBA disassociates tapering from tightening and the August decision and subsequent communications have highlighted some skepticism around the effectiveness of delaying what is a modest tapering announcement. But as the situation currently stands, to be adding less support to the economy amid a material downgrade to the outlook and increase in uncertainty risks sending conflicting signals.
