ANZ economic David Plank expects Australia’s central bank to announce a delay in the planned reduction of its weekly bond purchases as Australia takes a bigger than expected hit from the current lockdowns.
Last month, the Reserve Bank of Australia surprised the market by reaffirming its decision to slow down its bond-buying program and said it would start reducing its weekly bond purchases from $5 billion to $4 billion this month.
The minutes from the RBA August Board meeting revealed that any delay in tapering its bond purchases would require a “significant setback”
They indicated that the RBA is expecting a strong rebound in 2022.
Now that the health crisis has worsened and lockdowns are ongoing, the RBA will likely delay the planned tapering until next year, Plank said.
“We think the RBA will announce a delay in the planned reduction of its weekly bond purchases next week.”
Plank said the RBA was faced with two options; announce a delay in tapering until at least its November board meeting, or reduce the tapering as planned but commit to keeping it at $4 billion until the February Board meeting.
"We think a simple delay is much easier to communicate than this alternative."
The economist stressed that this decision is likely to be a close call.
He said indicators like ANZ Roy Morgan Australian Consumer Confidence and ANZ Job Ads show more resilience in the face of lockdowns than last year, as does National Australia Bank's Business Conditions report.
Using the reasoning the RBA applied in August suggests the same conclusion should be reached, ie no delay to taper.
However, the economist argued that the downside risks to the 2022 outlook have increased and not only for domestic reasons given a slower China and the global uncertainty posed by Delta.
“At the very least, Australia’s starting point for 2022 will be weaker, implying that wages growth and inflation are lower than previously expected,” he said.
“In our view, the prospect of a weaker starting point and greater risks around the 2022 outlook support a policy response even if the central scenario of a strong rebound next year is intact.”