Major banks split on RBA tapering decision

The RBA board had stated in their meeting in July that they planned to proceed with tapering due to the “resumption of strong growth in 2022”. However, ongoing lockdowns across NSW and Victoria have raised speculation over whether proceeding in this manner would be appropriate.

Ahead of Tuesday’s meeting, Westpac, CBA and ANZ have said they believe the tapering will be postponed, while NAB and Macquarie have indicated it will proceed as planned.

Westpac pointed out that when the RBA made its original tapering call, COVID-19 cases in NSW were running at around 200 per day while Victoria was completely open. Upon the publishing of their weekly report on 3 September, NSW had recorded 1,431 cases while Victoria reported 208.

As a result, Westpac expects the economy to contract by 4 per cent in the September quarter, before growing by 1.6 per cent in December. But despite the slight December uptick, the big four has lowered its growth forecast for 2021 from 2.4 per cent to zero.

As such, Westpac noted that while the RBA may have earlier considered proceeding with tapering, it expects that the board will now be getting advice that the contraction in the September quarter will be much greater than 1 per cent and the growth forecast in 2021 will be slashed.

“I think there is no doubt of ‘worsening health outcomes’, so it would be quite extraordinary if the board did not decide to delay the taper,” said chief economist Bill Evans.

CBA has echoed this sentiment, stating that the hit to the economy from the Delta variant has been much higher than expected.

“With the hit to the economy from Delta-induced lockdowns far more significant than anticipated, we expect the board to stick with current levels of purchases through November,” said senior economist Ryan Felsman.

The hit to the economy has also informed the view at ANZ, who said that the RBA should not allow the economy to continue contracting without stimulus to combat it. Doing so would place Australia at a weaker starting point for recovery, the bank said.

“The downside risks to the 2022 outlook have increased and not only for domestic reasons, given a slower China and the global uncertainty posed by Delta,” said David Plank, head of Australian economics for ANZ.

“At the very least, Australia’s starting point for 2022 will be weaker, implying that wages growth and inflation are lower than previously expected.”

On the flipside, NAB has suggested that a sharp rebound in Australia’s economic situation is expected soon, which will give the RBA confidence to proceed with tapering.

The bank highlighted that NSW is expected to significantly ease lockdown restrictions in mid-October, assuming the state reaches its target of 70 per cent fully vaccinated adults by this time.

“Expectations for a strong rebound in activity after the current lockdowns remain largely intact, though the optics of tapering amid protracted lockdowns mean it is likely to be a close decision,” said NAB’s director of economics, Tapas Strickland.

At the time of NAB’s 6 September weekly report, 40.8 per cent of NSW adults were fully vaccinated, with 73.5 per cent having had one dose.

Macquarie also expects that the reasons the RBA gave in August for proceeding with tapering would not have changed.

The following statement from the August meeting was highlighted.

The RBA said it “would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery”.

The term “significant setback” has led the bank to suggest that a relatively high bar will need to be met for tapering to be delayed.

With momentum in pre-lockdown economic demand expected to contribute to a swift recovery once restrictions ease, Macquarie believes the RBA to emphasise that recovery remains on track, despite current lockdowns.