RBA pushes on with plans to wind back QE amid temporary Delta setback

The Reserve Bank will push on with its plan to gradually reduce the size of its quantitative easing program, pinning its hopes on a strong economic recovery once COVID-19 lockdowns come to an end.

The RBA, following its regular monthly board meeting on Tuesday, confirmed it would continue with the plan to reduce to $4 billion from $5 billion its regular weekly purchases of government debt. However, it will extend the program at the lower level until at least mid-February, rather than November as previously announced. It maintained official interest rates at their record low level of 0.1 per cent.

The Reserve Bank maintained official interest rates at their record low level of 0.1 per cent.Credit:Louie Douvis

RBA governor Philip Lowe said the COVID-19 outbreak of recent months would have a material impact on the September-quarter GDP result and result in the jobless rate increase over the coming months.

He said the impact had been uneven, with some areas facing difficult conditions while others were growing strongly.

“This setback to the economic expansion is expected to be only temporary. The Delta outbreak is expected to delay, but not derail, the recovery,” he said. “As vaccination rates increase further and restrictions are eased, the economy should bounce back.

“There is, however, uncertainty about the timing and pace of this bounce-back, and it is likely to be slower than that earlier in the year.”

Dr Lowe said the bank expected the economy to resume growing through the December quarter, with growth back to its pre-Delta path by the second half of next year.

He said the decision to extend the purchase of government debt to mid-February was a result of the current lockdowns.

“The RBA board will continue to review the bond purchase program in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target,” he said.

Ahead of the recent lockdowns, growth had been strong but wages growth remain muted. House prices were also continuing to grow strongly.

“Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully, and it is important that lending standards are maintained,” he said.

Dr Lowe reiterated the bank’s stated position that it did not expect to start lifting official interest rates until before 2024, adding the jobs market had to be tight enough to generate wages growth “materially higher” than current rates.

The RBA’s decision followed further signs of the economic pain being caused by the lockdowns affecting NSW, Victoria and the ACT.

The Australian Industry Group’s performance of services index dropped by almost 12 per cent in August, hitting an 11-month low.

The fall was caused by a 25 per cent collapse in sales and a sharp drop in new orders. However, employment was up slightly in a sign that businesses are still holding on to workers despite the lockdowns.

Consumer confidence is also being dinted by COVID-19, with the ANZ-Roy Morgan weekly measure of consumer sentiment falling by 1.8 points over the past seven days. The proportion of optimists and pessimists is now evenly balanced.

The measure is now more than 8 per cent below its 2021 average, with falls in NSW and Victoria along with a drop in attitudes towards personal financial situations.

About 26 per cent of those surveyed said they were better off financially than a year ago, while 29 per cent said they were worse off. Just 11 per cent expect good times for the Australian economy over the next year compared with 28 per cent who expect “bad times”.

ANZ’s head of Australian economics, David Plank, said sentiment fell by 5.3 per cent in Sydney and 0.8 per cent in Melbourne, while it was up 5 per cent in Adelaide.

“The most notable thing in this week’s release is the jump in inflation expectations to its highest level in almost three years,” he said. “The weekly reading can be volatile, so we need to be a bit cautious about overplaying the move but, if sustained, it will cement the sharpest jump in inflation expectations since we moved to collecting the data on a weekly basis.”

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Shane Wright â€" Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via Twitter or email.

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