ricardian ambivalence

Sep RBA preview

The RBA meets on 7 Sep. The data was strong in Q2, but the outlook is dimmer due to Delta. Bond market capacity makes faster QE unlikely. The most likely outcome is to pre-commit to buy at 4bn per week until at least Feb’22.

How to fix RBA QE

The RBA can push back the constraints on their Bond Purchase Program by buying beyond May’32 and buying more Semis. Doing both would create scope to ease policy by accelerating QE, if that was required.

Three problems with RBA QE

There are three main problems with RBA QE: The RBA owns too large a share of the lines it does buy. The tenor of the bonds they buy is shortening. And Semis want to issue longer than the RBA buys to fund infrastructure.

How much is enough? (for the RBA to act in Sep)

The lockdown situation is twice as bad as the RBA had in their August SOMP. Using Gov Lowe’s rule of thumb that consumption falls 15%, a Q3’21 GDP forecast of around -3% seems plausible (v. RBA -1% in the Q3 SOMP). The probability that the taper is dropped in Sep is rising.