JP Morgan says the RBA will stick steadfastly to tapering plans

Given much weaker economic conditions, many of the country’s economists reckon The Reserve Bank of Australia will back away from its previous plans to taper its bond-buying program this month. 

In contrast, JP Morgan economist Ben Jarman expects the RBA to go ahead with tapering.  

“Despite calls for a policy response, the leadership has opted to look through localised lockdowns, passing the baton to fiscal policy and continuing on its tapering journey,” he said. 

Jarman is certain that the RBA board will stick steadfastly to this plan at this week's policy decision, announcing that bond purchases will continue in September, but at a reduced pace of $4 billion each week. 

“Recall that at the August meeting, the board chose to affirm the case for tapering, rather than simply maintaining the current pace for now and deferring comment on the pace of tapering," he argued. 

"We see this as a strong inclination to withdraw from purchases, which should have galvanised further as US Fed officials flag their own retreat, and local data suggest strong momentum heading into 3Q restrictions." 

Given the baseline set by the August commentary, Jarman thinks the governor’s remarks this week are likely to be just as upbeat, considering the labor market data released in the interim.  

“The data so far confirm the staff’s expectation that “most of the adjustment…” (from lockdowns) “…is likely to take place through a reduction in hours worked and participation” rather than unemployment, he argued.  

Stronger numbers 

Jarman pointed out that further progress on vaccination also supports the transition path from pandemic to endemic as the governor flagged in recent parliamentary testimony.  

The economist further argued that the June quarter GDP growth in Australia came in at 0.7 percent on the quarter which is a shade stronger than the consensus forecast of 0.4 percent. 

While the second-quarter numbers are somewhat dated given the known drag coming in the September quarter, he said it’s important to highlight that the saving rate remains elevated (9.7 percent) of disposable income) and is likely to increase as lockdowns weigh on consumption.  

Based on the 2020 experience, Jarman said an elevated saving rate will deliver a meaningful tailwind for consumption from the 2021 fourth quarter as mobility restrictions lift and households can spend more freely. “ 

“Adding to our sense of a consumer-led GDP rebound is the ongoing strength in the labour data, with the most recent survey for July reporting a jobless rate at 4.6 percent, the lowest since 2008/09.  

The economist allows for the possibility that the data deteriorates in August/September as Covid uncertainty weighs on hiring activity. 

That said Jarman said given current levels, it’s hard to see the unemployment rate moving materially higher than 5 percent. 

 

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