Australia Sticks With Taper Plan Even as Virus Dents Economy
The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly: Governor Philip Lowe
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A surprisingly bullish Reserve Bank of Australia said it will stick with its planned tapering of bond purchases, wagering that the economy will recover rapidly from a contraction this quarter driven by Sydney’s protracted virus lockdown.
The currency rose after Governor Philip Lowe wrong-footed economists by staying on track to reduce the pace of weekly buying to A$4 billion ($3 billion) in September from A$5 billion now. The RBA also maintained the cash rate at 0.1% as had been widely expected.
“The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly,” Lowe said in a statement that highlighted the strength of the recovery so far. “The economy is benefiting from significant additional policy support and the vaccination program will also assist with the recovery.”
The new rate of purchases will last until at least mid-November, the central bank said, essentially setting up that month as the next possible time for a further scaling back of bond buying. Still, Lowe continued to insist that conditions for an interest rate hike won’t be met before 2024.
The surprise decision to hold firm on tapering reflects an underlying confidence at the central bank that with a softer currency and lower yields, as well as existing monetary settings, the economy has more than enough support to quickly bounce back from a lockdown-induced contraction.
The governor added that the RBA will maintain a flexible approach on bond buying, securing some scope to act should conditions deteriorate.
“With the bond yield falling to 1.15% lately from a high of 1.98% in February it may have concluded that there is actually little need to continue bond buying at the higher amount -- beyond the favorable optics,” said Shane Oliver, chief economist at AMP Capital Investors Ltd. in Sydney.
Despite the relatively upbeat tone of the bank, Lowe has repeatedly made clear that he doesn’t want to get ahead of the Federal Reserve when it comes to unwinding stimulus as he seeks to avoid repeating the RBA’s early interest rate increase after the global financial crisis more than a decade ago. Still, economists expect him to pull the trigger before 2024.
One of the main factors likely driving the RBA’s confidence in the resilience of the recovery is the improving jobs market. While employment could take a hit as the economy contracts this quarter, the RBA said it expected unemployment to fall to 4.25% by the end of next year and 4% by the end of 2023.
The central bank will release a suite of updated forecasts on Friday, when the governor also fronts a panel of lawmakers for testimony.
Besa Deda, chief economist at St. George Bank, noted a change of language around the expectations for wage and price inflation as Lowe dropped the weaker word “modest” to describe the outlook in favor of a “gradual pickup.”
“We think the first rate hike will come in the first half of 2023, assuming that the contraction is confined to one quarter and the outbreak doesn’t materially envelop the rest of Australia,” she said.
The Australian dollar climbed after Lowe’s statement, and was trading at 73.97 U.S. cents at 4:28 p.m. in Sydney.
Sydney has been hitting record daily infections despite five weeks of strict stay-at-home orders. The city accounts for 25% of Australia’s output and 22% of employment. The crisis reflects a tardy vaccine roll-out that’s left the population vulnerable to the highly contagious delta variant during the southern hemisphere winter.
Australia had been a leading light in the global recovery and was on track to achieve Lowe’s goal of around 4% unemployment earlier than predicted. The jobless rate hit 4.9% in June from a pandemic peak of 7.4%.
The governor is pressing for a tight labor market that will spur wage growth and help return inflation to the RBA’s 2-3% target.
Outside of Sydney, the economy is still motoring along and labor shortages are emerging, helped by the country’s largely closed borders. Australia has also been buoyed by a surge in the price of iron ore, its largest export.
What Bloomberg Economics Says
“The RBA is unlikely to tamper further with their proposed tapering unless there is a substantial lift in yields, appreciation of the currency, or deterioration of the fiscal position. We remain of the view that the cash rate is likely to remain on hold until late 2024.”
-- James McIntyre, economist
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Chris Read, a strategist at Morgan Stanley, sees the central bank lowering its pace of bond purchases again before year’s end.
“The RBA has flagged November as the next key decision point around tapering -- while this will be heavily dependent on health outcomes and macro data,” he said. “We expect there will be enough green shoots at this point to see another incremental taper in the rate of QE purchases.”
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