RBA Sticks With Cautious Taper Plan as Delta Sweeps Economy

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The Reserve Bank of Australia pushed ahead with a cautious winding back of its bond-buying program, underlining its confidence in the economy’s recovery prospects once a longer-than-expected virus wave abates.

Governor Philip Lowe and his board said they will purchase government securities at a pace of A$4 billion ($3 billion) a week, down from A$5 billion previously, until at least mid-February. 

The central bank had originally planned to review the program in mid-November but said an extension was necessary due to a delay in the economic recovery and increased uncertainty stemming from the outbreak of the delta variant of Covid-19.

Ten of 16 economists had expected the central bank to hold off tapering because of delta-triggered shutdowns in Sydney and Melbourne. The RBA maintained its key interest rate at 0.1% as expected.

Lowe’s decision to proceed with the taper, while extending its duration, showed his desire to maximize flexibility to respond to the economic fallout from delta, which is proving far more difficult to contain than expected.

The RBA’s gentle shift from ultra-accommodative settings also fits in with more nuanced recent signaling from global policy makers. The Bank of Canada has taken the lead on tapering, the European Central Bank may follow this week and the Federal Reserve is likely to do so later this year, but all are highlighting the gradual and flexible nature of their moves.

Australia’s economy is set to contract sharply this quarter and economists are downgrading fourth-quarter growth estimates as well. Westpac Banking Corp. now sees growth this year wiped out by delta.

The Australian dollar briefly jumped before giving up gains and softening as the market’s focus switched from the tapering to the longer buying period. The Aussie was trading at 74.18 U.S. cents at 4:51 p.m. in Sydney, in a relatively contained range. The S&P/ASX 200 was little changed, as were bond yields.

“They’re having their cake and eating it as well,” said Phil Odonaghoe, an economist at Deutsche Bank AG. “It’s a dovish taper. Expectations were about 50-50 on whether they would proceed with the taper or not and the RBA seems to be trying to accommodate both camps.”

By standing firm on the taper, the RBA largely stuck to its view that the economy has sufficient support to recover. A lower currency, low bond yields and increased state and federal government support are already cushioning the virus impact. Lowe said in his statement that the setback from delta would “delay, but not derail” the recovery.

What Bloomberg Economics Says

“The decision is a case of ‘less is more.’ While the central bank stuck with its July tapering decision, by extending the time it will continue buying bonds at the A$4bn per week pace it will end up buying more than originally planned in July. A further taper is likely in February, but unlike elsewhere, where a reduction in bond buying represents removing some accommodation, in Australia’s case it’s the RBA tailoring its purchases to match the reduction in bond supply as the fiscal position improves.”

--James McIntyre, economist. 

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Still, uncertainties remain. Australia’s Covid-Zero policy is under pressure as New South Wales and Victoria states abandon the effort in favor of vaccination rates of 70%-80%. That’s created complications as states differ over the handling of the virus, a lack of alignment that suggests delays in border reopenings.

“Learning to live with the virus will likely mean we will be reopening with high case numbers,” said Matthew Bunny, an economist at St. George Bank. “This could mean consumer spending won’t bounce back as quickly as it has in the past. Plus businesses are feeling the pinch from another round of lengthy lockdowns.”

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