Analysts are split on whether the Reserve Bank of Australia (RBA) will delay tapering plans at its September policy meeting next week, as a faster roll out of coronavirus vaccines offsets a harder-than-expected economic blow from lockdowns.
Some 36 of 37 analysts polled by Reuters expect the cash rate to stay at 0.1%, where it has been since a cut last November. This is no surprise given the RBA still argues a hike is unlikely until 2024 when it hopes wage growth and inflation will have finally picked up to desired levels.
More uncertain is whether it will delay a taper of its A$5 billion in weekly bond buying, part of a package of stimulus measures enacted last year as the economy was emerging from a pandemic-driven recession.
The bank surprised many in August by sticking with plans to cut its bond buying to A$4 billion a week starting this month. Since then, the spread of the Delta variant has shut more cities and is set to cause a vicious contraction this quarter.
Yet of the 25 analysts that responded, 15 said the bank would not delay the taper and only 10 that it would.
Fewer wanted to comment on whether the RBA should delay, but of those that answered five said they should pause and 10 that they should go ahead and taper.
The main argument for a pause is that the economic damage done by harsh lockdowns in Sydney, Melbourne and Canberra will be greater than the RBA first expected and the likely recovery more prolonged given restrictions will only be eased gradually.
David Plank, ANZ’s head of Australian economics, also argues that the outlook for next year has been clouded by the global spread of Delta combined with the slowdown in China.
“In our view, the prospect of a weaker starting point and greater risks around the 2022 outlook support a policy response by the RBA, even if the central scenario of a strong rebound next year is intact,” said Plank.
As a result, he argues the RBA should delay tapering until at least the November Board meeting to see how events develop, not least of which is the pace of vaccinations.
The federal government has a plan to ease restrictions once 70% of the adult population are vaccinated and to abandon mass lockdowns altogether at 80%, though not all the states are on board with this vision.
After a slow start, Australia has now fully vaccinated 36.4% of the 16+ population, while 60.5% have at least one dose. Currently it is on track for 70% fully vaccinated by October and 80% by November.
The RBA’s argument last month was that fiscal stimulus was the appropriate response to this crisis rather than monetary policy. Also, buying A$5 billion of bonds a week rather than A$4 billion would have only a “marginal” effect at present for an economy with an annual GDP of A$2 trillion.
“We think the RBA will stick with its modest QE taper plan,” said Nomura economist Andrew Ticehurst. “
“Progressive government reopening plans form part of this thinking, and should offset an expected sharp decline in Q3 GDP, which we acknowledge will likely be weaker than the RBA expected a month ago.”