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RBA Should Immediately Boost Quantitative Easing Programme on Aug. 03 says Westpac

RBA must act sooner rather than later

Image © ArchivesACT, Reproduced under CC Licensing, Editorial, Non-Commercial

The Reserve Bank of Australia must react sooner rather than later to signs that the economy is suffering a sharp slowdown in activity says one of the country's big banks.

Economists at Westpac say the Reserve Bank of Australia (RBA) should boost its quantitative easing programme at next week's policy meeting, as opposed to waiting until the September meeting.

If the RBA to in fact boost quantitative easing it would come as a surprise to currency markets.

"Immediately lifting the purchase pace from $5 billion a week to $6 billion would send exactly the right message – the new flexible policy is responding to a significant deterioration in the economic outlook," says Bill Evans, Chief Economist at Westpac.

The RBA at its July meeting said it was on target to whittle down the size of its quantitative easing programme, judging that the economy was expanding at a health pace while unemployment was falling faster than expected.

But at the time the risks posed by Covid to the economy were considered relatively small; indeed the assumption by the RBA and economists was that lockdowns would be short in duration.

Sydney's current lockdown is now only expected to end on August 28 and there is even speculation that it could be extended.

Despite five weeks of lockdown, infections in the nation's largest city continue to spread with figures revealing a further 170 new cases on Friday.

The situation in other states remains precarious given the transmissibility of the Delta variant.

Westpac say they have downgraded their forecasts for the country's economy from –0.7% to –2.2% in the third quarter.

But the rebound in the final quarter is raised from 2.6% to 3.0%.

They expect the New South Wales economy to suffer a 7.8% contraction in the third quarter as a result of the lockdown and a strong expected bounce-back in the final quarter (up 5.8%) when Sydney reopens.

"Our calculations, which relied on our estimates of the impact on hours worked of the lock-down, are based on the assumption that it will remain in place until September 30," says Evans.

Unemployment is forecast to rise to 5.7% by September.

"There seems little doubt that the Board will be advised that the Australian economy is set to contract in the September quarter," says Evans.

The RBA has said it remains flexible in its approach to quantitative easing and that it would boost it if the economic situation required.

"If, as we expect, the Board is advised of a sharp deterioration in the economic outlook, why not use its newly acquired flexible policy instrument to respond immediately?" asks Evans.

Westpac say lifting the purchase pace from A$5BN a week to A$6BN would be an appropriate response given the expected contraction in the economy.

"An unexpected contraction in the economy with a subsequent uncertain outlook is good reason to act decisively which no reasonable person would interpret as 'panic'," says Evans.

Evans says boosting quantitative easing would be a surprise to the market, therefore if correct volatility in Australian bond markets and the Australian Dollar is highly likely.

"The market is comfortable with the deferment of the taper a lift in purchases would come as a surprise. However, markets are never disrupted for long when a surprise is correctly interpreted as good policy," says Evans.

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