VIEW: Westpac: Strong Growth Outlook Points To Limited QE Beyond May

Friday saw Westpac chief economist Bill Evans note that "Reserve Bank Board chose to go ahead with the taper of its weekly bond purchases from A$5 billion per week to A$4 billion when the QE2 A$100 billion program expired in the first week in September. There was considerable speculation that in view of the deterioration in the economy since the August Board meeting the decision to taper purchases would be deferred until November when purchases were scheduled to be reviewed. But, presumably in recognition, of that deteriorating near term growth and health situation it chose to cancel the review that was planned for November until February."

• "Given that in August it is likely that the Board had planned to further reduce the purchase program to A$3 billion in November maintaining A$4 billion through to February just lowers purchases in the first stage of the September - February period by around A$11 billion but lifts purchases in the second stage by A$12 billion. With the real "pain" in the economy almost certain to be in the first stage rather than the second stage it seems somewhat curious to have rebalanced policy in that way. We will now see a fixed A$4 billion per week program extending to February and totalling A$84 billion in total purchases."
• "The Governor acknowledged that GDP was expected to decline materially in the September quarter and the unemployment rate would move higher but was emphatic that "the economy is expected to be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year." If that growth profile eventuates then it is reasonable to expect that the February review would see a further reduction in purchases to A$2 billion (a larger taper than in September given the much improved current economic circumstances relative to the deteriorating circumstances in September) with a view to ending the program by mid-May. That would define the bottom of the likely range of future purchases (A$84 billion plus A$26 billion) of A$110 billion with an upper range of (A$84 billion plus A$39 billion plus A$26 billion) A$149 billion were the program to be scaled back to A$3 billion in February and extended by A$2 billion to mid-August.
• It seems certain that if the Bank's outlook for the economy "around its pre-Delta path in the second half of the year" proves correct then the QE program would be wound up by August at the absolute latest."