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RBA Adopts Dovish Tapering as Delta Outbreak Expected to Hurt Growth in 3Q

At the September meeting, the RBA decided to reduce QE asset purchases to AUD 4B/week, from ADU 5B/ week previously. It also left the cash rate, as well as the yield target on the April 2024 bond, unchanged at 0.1%. The central bank did include a dovish twist, signaling that further tapering would come later than previously anticipated.

The central bank indicated that the new pace of asset purchases would continue “until at least mid February 2022”, compared with the previous guidance that the purchases would be reviewed again in November 2021. This signals that the next phase of taper (probably further reduction to AUD3B/week) would occur in February 2022 the earliest, and the entire QE program would end by late 2022. On the policy rate and yield curve control, policymakers maintained the forward guidance that there would be no rate hike until “actual inflation is sustainably within the 2 to 3% target range”, a condition unlikely to be met before 2024.

The decision to delay the timing of the next tapering was driven by the Delta outbreak and related lockdown measures. Policymakers noted that the resurgence of the pandemic would result in a “material decline” in 3Q21 GDP and slower subsequent growth rebound. They, however, remained cautiously optimistic, suggesting that the “setback to the economic expansion is expected to be only temporary” and that the economy would return to its “pre-Delta” path in 2H22. They also noted the “uncertainty about the timing and pace of this bounce-back” and the likelihood the recovery is “slower than that earlier in the year”. The job market is also expected to be affected with the unemployment rate likely moving higher in coming months and underlying wage staying “subdued”.

The central bank acknowledged the strength of the property market, indicating that housing credit growth has picked up “due to stronger demand for credit by both owner-occupiers and investors”. In the past statement, it only noted strong credit demand from owner-occupiers and first home buyers only. Yet, it has no intention to curb the activities through higher rates and merely maintained the language that it is “monitoring trends in housing borrowing carefully and it is important that lending standards are maintained”.