Will The RBA Go Through With The Taper?

By Orbex

We can expect an important reaction in the Aussie dollar and the ASX no matter what happens at tomorrow’s RBA meeting.

That said, economists and analysts are pretty divided on their expectations for what the Reserve Bank will do. Without clear direction, the markets are vacillating in pricing in what will happen.

The core issue is whether the RBA will go through with announcing a reduction in their asset purchasing program, a process known as “tapering”.

Back in July they announced that it was coming, and at tomorrow’s meeting, they would cut bond-buying by AUD1.0B per week. Specifically, it would be from AUD5.0B to AUD4.0B per week.

What’s been going on

At the last meeting, the market was shocked when the RBA decided to stick to their taper schedule.

That was despite increasing covid cases in Melbourne and a lockdown on one-quarter of the country’s economy. Since then things got worse. Especially with lockdowns spreading to the capital and Sydney.

All told, the estimate is for the lockdowns to have a -4.0% impact on the country’s GDP. This would effectively put an end to the recovery and create a “second dip” recession.

Most economists agree that the recovery this time won’t be as fast, given the global situation and in particular the economic challenges in China.

So, why might the RBA keep going with the taper?

Following the last meeting, Lowe argued that the bank views direct fiscal stimulus as more effective in addressing the economic issue than monetary policy.

Asset purchases have the objective of reducing the cost to borrow by depressing bond yields. This is a broad-spectrum approach. Meanwhile, it’s chiefly small businesses that lockdowns impact and they don’t have access to the bond markets.

A further argument that the bank made is that a one billion Aussie dollar-a-week reduction in asset purchase would have only a “marginal” effect, given the size of the economy of over AUD2.0T.

Furthermore, the amount of cash held in the Reserve Bank has been increasing. This suggests that the issue with the economy isn’t a lack of liquidity at the moment.

What are the odds?

If we combine the surprise to the market at the last meeting where the RBA kept their taper on track, plus other underlying reasons given for tapering remain.

That’s why there is a substantial majority of economists who expect the RBA to taper at this meeting. In the latest Reuters poll, 25 economists support tapering against 10 who say they will hold off.

With the market not pricing in either option, we can anticipate a strong move in assets regardless of the outcome. If the RBA goes through with the taper, the stock market could take a bit of a temporary hit. The currency could also get a little stronger with a marginal increase in yields.

Should the RBA decide to hold off on the taper, the degree of the market reaction might depend on the reasons given, and for how long the pause is.

If they commit to a one-month pause, there might be a mild reaction. However, if they announce they are doing away with the taper until “the situation improves” or something like that, the consequences could be more severe.

Then we could see a better performance in the stock market, but a weaker Aussie.

Article by Orbex

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