RBA Considered No-Taper But Opted For Taper On Econ View, Flexible Framework

By Sophia Rodrigues

(Sydney, July 20, 2021)—The Reserve Bank of Australia acknowledged there was a case for retaining bond purchases at A$5 billion a week following the end of the current program but opted for tapering because of better-than-expected economic outcomes and improved outlook.

“Members acknowledged that an argument could be made to retain the pace of bond purchases at A$5 billion per week, given that economic outcomes were still well short of the Bank's goals for inflation and employment,” the RBA said in the minutes of the July board meeting, published Tuesday.

The decision to taper was also helped by the new framework for bond-buying where there is flexibility to increase or reduce weekly bond purchases in the future. So, rather than committing to specific rate of purchases over an extended period, the RBA will increase or cut purchases as warranted by the state of the economy at the time.

Importantly, the RBA made the decision after noting that the virus outbreaks and the lockdowns had created additional uncertainty. At the same time, it observed that the experience to date had been that the economy bounced back quickly once outbreaks were contained and restrictions eased.

At the board meeting, the RBA announced it will buy bonds at the rate of A$4 billion per week following the end of the current program in early September from A$5 billion per week currently. The new rate of buying would apply “until at least mid-November 2021” and will be reviewed at the November board meeting.

While the framework allows the RBA to back out of the plan to taper in early September given extended and new lockdowns in some states, it is unlikely it would opt for that option. A more likely scenario is that the RBA will use the option at the November board meeting to not taper further but much would depend on the state of the economy then and the updated forecasts.

The RBA said the bond purchase program had lowered risk-free rates across the yield curve in Australia, and in doing so had reduced borrowing costs for households and businesses, supported asset values and contributed to a lower exchange rate than would otherwise have been the case.

“Through these channels, the bond purchase program had been one of the factors underpinning the accommodative conditions necessary for economic recovery from the pandemic,” it added.

The RBA maintained the forward guidance that it will not increase the cash rate until actual inflation is sustainably within the target range but appeared more emphatic that this condition “will not” be met before 2024.

On the three-year yield target, the RBA said its central scenario implied that the conditions for an increase in the cash rate would not be met until 2024. But the faster-than-expected recovery in economic conditions over the course of 2021 had widened the range of alternative plausible scenarios for the economic outlook and therefore the cash rate over the period to November 2024.

After taking this into account, it decided to retain the April 2024 bond as the target bond, and not to extend the horizon to November 2024.

--Contact: sophia@centralbankintel.com