RBA likely to be split on QE tapering as Covid rages on

The RBA will again ram home the message that it won’t raise interest rates until 2024 at the earliest. Picture: AAP

The Reserve Bank suspending plans to taper its government bond-buying program in September is now a 50-50 proposition, with the central bank already moving to pulp the upbeat economic forecasts it published only weeks ago.

The debate around the RBA’s board table on September 7 over the scheduled reduction in weekly government bond purchases is set to be vigorous, as surging Covid-19 cases shutter key capitals, fuelling recession fears.

In early July, an optimistic RBA had signalled that it would start to withdraw extraordinary policy stimulus by reducing weekly bond purchases from $5bn a week to $4bn, with a further review of the taper set for November.

The upbeat mood was shattered by the June arrival of the Covid-19 Delta variant, which has spread rapidly and proved nearly impossible to contain.

Greater Sydney, one of the biggest drivers of national output, has been crunched by lockdowns since late June and mobility restrictions are likely to last in some form until November, when national vaccination rates are set to approach 70-80 per cent. Victoria is also battling a rising case load. The situation has locked down close to half the nation’s population.

The recent hesitancy to put tapering on hold is due to several factors: topping the list is the job market’s underlying resilience. Unemployment slipped below 5 per cent in June and July, exceeding expectations and supporting the idea that the economy can snap back quickly when lockdowns end.

There is also the view that any attempt to add to demand across the economy by tinkering with bond buying would be of limited benefit at a time when mobility and spending are effectively paralysed.

The RBA is still hopeful that pent-up demand will spark a consumer spending surge when lockdowns are eased, lifting economic output in the fourth quarter and fending off the ugly prospect of two consecutive quarters of contraction.

The central bank is also looking at other countries that have eased lockdowns, concluding that consumers are adaptable and things do bounce back.

There is also some reassurance from data in states that haven’t imposed lockdowns yet showing that unemployment continues to fall and job vacancies remain high.

Still, the RBA knows that its current set of economic forecasts are toast. There is little to no chance that GDP growth in 2021 will reach 4 per cent. Economists now expect it will be less than 1.5 per cent and the uncertainty around what’s to come has returned to levels last seen early last year.

Both factors support the idea that the RBA should do something, even if it is simply to avoid bad optics in the final months of the year.

The outcome of the September 7 meeting will come down to whether the bank feels that there is still a ray of light at the end of the tunnel, and it can therefore press on with the taper. There will be those who argue that the RBA needs to keep doing all it can to support the economy.

One option is for the central bank to taper in September while also signalling that it will keep buying bonds at the reduced rate beyond November. That would convey the message that it is prepared to buy more bonds over time than markets had expected.

Beyond the taper chatter, the RBA will again ram home the message that it won’t raise interest rates until 2024 at the earliest.

Soft wage data has done nothing to convince the central bank that incomes are rising sufficiently quickly. If anything, the goal of about 3.5 per cent wage growth – a prerequisite to raising rates – seems further away now than it did at the start of the year.

Dow Jones Newswires