Glynn’s Take: RBA Bonds Rise Buy Glass-Only Option
By James Glynn
SYDNEY – It’s not too far to imagine Reserve Bank of Australia Governor Philip Lowe in the wheelhouse of a squeaky machine called an economy, surrounded by whistling gauges, levers and pulley systems.
With every adjustment of the political dials, Mr Lowe tries to smooth out economic cycles, boost confidence, create jobs and, if possible, prevent the economy from falling into the abyss.
The time may be approaching for a further adjustment to the RBA’s government bond buying dial.
Bond purchases under the RBA’s quantitative easing program, which helps keep borrowing costs low for businesses, were due to be cut in September, as the RBA sensed that the economy was roaring in turmoil.
The planned reduction in bond purchases to four billion Australian dollars ($ 2.9 billion) per week, from 5 billion Australian dollars per week, amounts to a temporary adjustment of the political parameters. But he still announced loud and clear the RBA’s growing confidence in the recovery and its long-term political trajectory.
The decision to phase out the bond buying program, announced on July 6, was well founded. Unemployment fell to a decade low of 4.9% in June, shining the spotlight on the growing dynamics of the economy.
Given the chaos caused by the pandemic since the start of 2020 and the even worse scenarios that have been averted, do not underestimate the joy of central bank management at the news that full employment is now visible on the market. advanced radar.
But a key has gone into the works.
Sydney and Melbourne, the country’s two largest cities, are on lockdown and authorities are fighting to eradicate the rapidly spreading Delta strain of the Covid-19 virus. This has caused Sydney to sit still for weeks and its lockdown could extend into August or beyond.
About half of the economy has been slowed down as Sydney and Melbourne suffer their lockdowns. South Australia is also feeling some of the effects. Fears of a spread in the New South Wales region are also high. Combined, they could turn the economy around in the third quarter, stifling the strong recovery that marked last year.
It is therefore possible that the planned reduction in the quantitative easing program will be put on hold until at least November, when higher vaccination rates may have been achieved, greatly reducing the need for damaging lockdowns.
It could also be that the RBA will continue to move forward in September, confident that the heat remains in the economy and that the rebound will be robust after the lockdowns end.
Or, the RBA could invoke the flexibility it now announces in relation to its evolving political approach. Mr. Lowe spoke about making policy changes in response to data, not dates, and highlighted the possibility of increasing or decreasing bond purchases as needed.
There was talk this week that one option the RBA could pursue in September is to increase bond purchases to A $ 6 billion per week, scuttling the plan to cut to A $ 4 billion.
Westpac chief economist Bill Evans, a voice that demands attention given his long history of accurately forecasting RBA movements, said a jump to A $ 6 billion in purchases of ‘Weekly bonds in September would help build confidence.
Westpac is one of a growing number of economists who now expect the economy to contract significantly in the third quarter. The words “double dip recession” are also resurfacing.
“Raising purchases to AU $ 6 billion per week would send the right signal that the Board of Directors (RBA) was ready to use its new flexible policy tool to respond to changing economic conditions,” said Evans. . “It would be an effective signal that the RBA is ready to use its political tools flexibly to deal with any unexpected economic development.”
The problem with Mr Evans’ point of view is that a sudden surge in buying could create confusion and create undue alarm. The RBA might appear fearful of what is still likely to be a passing flurry for the economy.
High in the wheelhouse looking out, Mr. Lowe would still view increased bond purchases as an emergency option. It would be classified as a glass break option at this time.
Maintaining bond purchases at A $ 5 billion per week in September would also demonstrate the RBA’s willingness to be flexible in times of renewed uncertainty.
Leaving the QE dial unchanged is a much more likely option.
Write to James Glynn at [email protected]