VIEW: Westpac's Evans Flags Potential For A Lift In Bond Purchases

Westpac's Bill Evans notes that "the RBA has announced that it plans to begin tapering its bond purchases in early September. Our figuring is that the first week of the scaled back purchases will be the week ending September 10. In his speech following the decision to taper purchases from early September from A$5 billion to A$4 billion the RBA Governor noted, "We are not locked into any particular path and bond purchases could be scaled up again if economic conditions warrant". Given the awkward timing of the September Board meeting the Board may feel obliged to make any decision to review its bond purchase program at its August Board meeting. If a decision is made at the August meeting, it seems reasonable that the Board would choose to defer the taper until a further review in November. However, we believe a better approach would be to announce in August that the Board will instead review the taper decision at the September meeting. With the advantage of an additional month, the available partial data would give a better indication as to whether the Australian economy was facing contraction in the September quarter. Markets would be alerted to the possibility that a decision could be made to actually lift purchases from the week of September 10 to A$6 billion per week with a review in November. Lifting purchases to A$6 billion per week would send the right signal that the Board was prepared to use its new flexible policy tool to respond to changing economic conditions. If our forecasts prove to be correct a September decision to lift purchases on a temporary basis would be entirely reasonable. A lift in purchases from the A$5 billion to A$6 billion would mean an additional purchase program of a modest A$10 billion out to November but would be an effective signal that the RBA is prepared to use its policy tools flexibly to address any unexpected economic developments."