The RBA Board concluded at today's meeting that the spread of the Delta variant and the associated lockdowns is a case of recovery delayed, not derailed for the Australian economy. However, since the Board last met, conditions have deteriorated significantly and that has prompted a recalibration of policy. While the Board confirmed that its weekly bond purchases will be tapered from $5bn to $4bn, it has essentially offset that announcement by pushing back the timing for the next review of the QE program from mid November to mid February. All other settings were left unchanged, with 0.1% targets retained on the cash rate and 3-year AGS yield.
Back in August, the RBA's forecasts were for a contraction in Q3 GDP of "at least 1%" but in today's decision statement, Governor Philip Lowe noted the economy was now expected to "decline materially" and that the unemployment rate "will move higher over coming months". As a simple guide in highlighting the extent to which the situation has evolved, today's statement included 6 mentions of "Delta" whereas in August there were none. While conditions have deteriorated more sharply than earlier anticipated, the Board remains of the view that the setback will be temporary in nature. With vaccination rates accelerating, the RBA expects that some easing of restrictions will occur in the December quarter, setting in motion a rebound that it forecasts will see the economy return to its pre-Delta trajectory by the second half of next year. However, there are clear risks to that outlook with significant uncertainty around the timing and nature of reopenings, while it is less clear how quickly household spending will rebound on this occasion given the nation will be transitioning to living with the virus.
Clearly, between the setback to the economy in the near term and the uncertainty going forward, there was enough to encourage the Board to respond. While the Board again resisted reversing the tapering guidance it announced in July, a higher stock of purchases is now more likely. Consistently, the RBA states that it is the stock not the pace of purchases that is the more relevant consideration for policy. Under the July announcements, QE purchases were due to run at $4bn per week before coming under review in mid November. In the absence of the Delta disruptions, it is reasonable to think the pace would have been in line to be tapered further, to say $3bn per week. Under that scenario, today's announcements have effectively delayed a November taper. Based on my calculations, the effect this has on the stock will be an additional $11bn of purchases through to mid February.
Governor Lowe notes that the QE program will continue to be reviewed "in light of economic conditions and the health situation", but given the resistance put up to reversing the taper at the past two meetings where there has been a solid case to do so, it seems unlikely that the pace of purchases will be increased from here. Today's decision can be seen as the template should any further setbacks arise. The final paragraph of Governor Lowe's statement concluded by reaffirming the forward guidance that rate hikes were not foreseen before 2024 with the RBA's inflation and employment objectives still a long way from being met.
