RBA puts it into neutral with 4+4

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The RBA today made November’s decision and pre-committed to buying at a 4bn pace until at least February 2022. The overall tone of the statement was upbeat, despite the fact that they downgraded their Q3’21 assessment (it was -1%qoq in the August SOMP and is now expected to “decline materially”). Their forecasts for the recovery are more bullish than mine, with them having the economy back around the pre-Delta path in H2’22 (I have it in H1’23).

Their position is clearly that they have done a lot. They characterised today’s decision to buy at 4bn per week until at least February as an extension of the bond purchase program. The market reaction would tell you that it was a reduction.

The Board’s decision to extend the bond purchases at $4 billion a week until at least February 2022 reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak. The Board will continue to review the bond purchase program in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target. 

The tone suggests they were emboldened by their ‘nailing’ Q2’21 GDP in the August SOMP. It would have given them credibility about the recovery with the Board. I also think that this is a hawkish signal about their base case pre-COVID — very much consistent with their decision to resume using the market path for the cash rate in the August SOMP forecasts.

They have, however, accepted that the bounce back might be a bit slower this time around. They note the “uncertainty about the timing and pace of this bounce-back and it is likely to be slower than that earlier in the year“. However, it doesn’t amount to much for policy.

Of course, they didn’t mention the limited capacity of the bond market in the statement (and I don’t think they will do so in public). The main reason being that poor design is a self-imposed problem. They could fix it if they wanted to do so. However, if they continue to taper they won’t have to do anything about it. That seems like the most probable course for now.

Absent some shock (a new strain of COVID?) that pushes up bond supply, we should think of 4bn per week as the maximum. The outlook is for more tapering in 2022. I think this is the 4/4/3/2/1 scenario. It should see their share of the bonds they buy peak at ~50% in mid-2022. It also means that ES balances will peak around 500bn.

By the time that the RBA is proven right or wrong about these judgements, the economy will be growing very strongly. So the case for further easing will be weak — even if I’m right about the endemic COVID recovery being weaker and the economy being below the pre-Delta baseline until 2023. It may, however, delay the eventual hikes.

The next easing will probably be due to persistent undershooting of inflation and sub-trend growth. But that’s another story.