MNI STATE OF PLAY: Lockdowns Could See RBA Delay Taper

A decision to delay tapering purchases under its program of quantitative easing could emerge from the Reserve Bank of Australia Board meeting on Tuesday after renewed pandemic lockdowns in the important economic hubs of Sydney and Melbourne.

The central bank's program is to continue to purchase bonds at the rate of AUD5 billion per week until the current program runs out in early September, and then continue purchases at AUD4 billion a week "until at least mid-November."

Minutes from the last RBA meeting in August show that the bank considered delaying the taper then, but decided against it.

Since then, the lockdowns have continued and the public health situation in Sydney, regional New South Wales and Melbourne has worsened, calling into question the RBA's base case scenario which assumes widespread lockdowns will not continue into the fourth quarter.

DECISION IN AUGUST

The central bank's decision not to delay the taper in August was based on a view that maintaining the current level of bond purchases would be most effective if the economy was open, and not in lockdown.

The board consensus was that additional bond purchases would only have a "marginal effect at present", with around half of the population under lockdown in the two largest cities of Sydney and Melbourne, see MNI INSIGHT: RBA Baseline Forecasts Still Current In Lockdowns.

Board members noted the outlook for the economy was for a "resumption of strong growth in 2022" and that any additional bond purchases would have maximum impact at that time "which is when extra support might be needed."

NO CHANGES TO RATES

With the much of the economy still under lockdown, this view may prevail at this week's board meeting.

Even if bond purchases are reduced to AUD4 billion per week the bank has not ruled out an increase in the future if economic conditions demand easier policy.

No changes are expected to interest rates, which are likely to be maintained at the record low 0.10%, although the bank may give some further indication on when it believes rates could rise. Governor Philip Lowe has said he is comfortable for inflation to run at over 3% for a period, even though this was above its 2% to 3% target range.

The current position is that the RBA does not foresee that conditions will exist for a rate rise "before 2024".