Westpac says RBA should lift bond purchases immediately

  • By Elizabeth Fry

Westpac chief economist Bill Evans central bank should immediately increase its bond purchase program and defer its planned taper given the sharp deterioration in the economy. 

In his view, the Reserve Bank of Australia should lift its weekly bond purchases from $5 billion per week to $6 billion and reverse an earlier decision to taper bond purchases to $4 billion that was planned for September. 

“Immediately lifting the purchase pace would send exactly the right message - the new flexible policy is responding to a significant deterioration in the economic outlook,” he said. 

The high-profile economist further called on the RBA to maintain the $6 billion purchase through to November in recognition of the economy’s sudden deterioration and the uncertainty around the recovery phase. 

“While, quite correctly, the market is comfortable with the deferment of the taper a lift in purchases would come as a surprise,” he added. 

“However, markets are never disrupted for long when a surprise is correctly interpreted as good policy.” 

Evans said arguments against this policy option warn that such a policy change would signal “panic” by the Board, even though most commentators and the RBA staff themselves are, very likely, warning of the impending contraction in the economy.  

“An unexpected contraction in the economy with a subsequent uncertain outlook is good reason to act decisively which no reasonable person would interpret as panic.” 

The economist conceded that some would argue that another $1 billion in purchases will make little difference. That argument is probably correct, he went on to say, but a central bank will never dismiss the importance of its policy instruments. 

“We note that like other central banks, the RBA, argues that it is the stock of bonds held by the central bank which determines the degree of stimulus.  

“Market participants generally dispute that view but, at least at the very margin, a modest increase in purchases will further add to the stock and the stimulus.” 

Downgraded third quarter forecasts  

Westpac has downgraded its forecast for the third quarter predicting a 2.2 percent contraction up from 0.7 percent.  

That change reflected an expected 7.8 percent shrinking of the New South Wales economy in the September quarter as a result of Sydney’s lockdown. 

“Our calculations, which relied on our estimates of the impact on hours worked of the lockdown, assume that it will remain in place until September 30.  

“It also assumed that the construction sector would be operating at an average capacity of 60 percent throughout the lockdown.” 

Westpac has lowered its growth forecast for 2021 from 4.4 percent to 3.2 percent while lifting its forecast for 2022 from 3.2 percent to 4.2 percent.