RBA makes cash rate call for September, decides to taper bond purchases

With the economy bearing the brunt of a new round of lockdowns in the country’s most populated cities, the RBA has held the official cash rate at an all-time low of 0.1 of a percentage point for the ninth consecutive month.

Prior to Sydney’s prolonged lockdown, which recently spilled into the regions and into neighbouring Victoria, speculation was running wild that interest rates would lift before the RBA’s long-term deadline of 2024, but the situation has now changed considerably, with the economy under another recession threat.   

According to chief economist at CreditorWatch Harley Dale, it’s now clear that the RBA won’t be altering the rate situation for a “substantial time”.

Complementary RBA policies to maintain downward pressure on borrowing costs are also expected to persist.

“As the duration of lockdowns increases so does business uncertainty — this is the biggest enemy we confront through the remainder of 2021,” Mr Dale noted.

“This is vital to businesses, especially small and medium-sized enterprises (SMEs) which are disproportionately affected by the current economic conditions.”

Mr Dale noted that while economic conditions will be ripe for a strong recovery at some point, “that seems a long way off right now”.

“The number of defaults is rising. Meanwhile, the number of credit enquiries is falling, and as a key indicator of business conditions, this metric highlights the challenges SMEs will face through the remainder of 2021,” he said.

This sombre sentiment is widespread across much of the financial services industry, with a majority of economists cautioning of the economy’s precarious position.

Shane Oliver from AMP Capital believes a rate hike is a long way off.  

“The lockdown, and its hit to economic activity, has further delayed the time when the effective RBA conditions — full employment and 3 per cent or more wages growth to sustain 2–3 per cent inflation — will be met to justify a rate hike,” Mr Oliver said.

Commonwealth Bank’s Stephen Halmarick agreed, noting “current lockdowns will reduce growth and wages/inflation and delay rate hike into 2023”.

Alex Joiner from IFM Investors also flagged a delay in the bank’s efforts to return the economy to full employment and inflation to target.

RBA to proceed with tapering 

But the RBA's decision to proceed with tapering its weekly bond purchases from $5 billion to $4 billion a week did surprise as many as 3 out of 5 Australia’s major banks.

Speaking on the decision to push ahead with tapering, RBA governor Phillip Lowe highlighted the considerable momentum seen in the Australian economy prior to the Delta outbreak.

“GDP increased by 0.7 per cent in the June quarter and by nearly 10 per cent over the year,” said Mr Lowe

“Business investment was picking up and the labour market had strengthened. The unemployment rate had fallen below 5 per cent and job vacancies were at a high level”.

Looking forward, Mr Lowe noted that the Delta outbreak is expected to delay, but not derail, the recovery.

The bank did however confirm that it will purchase bonds at this rate until at least mid-February 2022, rather than to “at least mid-November” as previously flagged.

However, Anthony Doyle at Fidelity International believes the bank may have made the wrong decision.

"Today’s decision to taper the bond purchase programme is a step in the wrong direction for monetary policy at this point in time," Mr Doyle said.

He noted the importance of quantitative easing, underlining that it reflects global monetary conditions rather than domestic conditions, and is key to boosting household wealth. 

"With unemployment likely to rise materially in Q3, and wages rising by a tepid 1.7 per cent over the year to the end of June 2021, more has to be done to drive the economy towards full employment in the short term. A weaker currency and lower bond yields via an expansion of the QE programme would have assisted in meeting the inflation and employment goals of monetary policy, and arguably an increase in bond purchases - rather than a reduction - should have been announced at today’s meeting," he said.