Westpac says the RBA decision today reveals that the hurdle for adjusting policy is surprisingly high
Growing expectations going into the policy meeting today was that the RBA would have kicked the tapering can down the road but they certainly surprised when they didn't.
Westpac highlights that the rationale behind the RBA's decision hinges on the central bank arguing that "the experience to date has been that once virus outbreaks are contained the economy bounces back quickly".
And it was a surprise that policymakers did not adjust bond purchases in recognition of the complex set of risks posed by the spread of the delta variant. Adding that:
"Arguably, what we have seen today is the view that adjusting policy may have detracted from the perception of the RBA's confidence in the recovery.The Board will still retain flexibility to respond in September or October should conditions deteriorate substantially more than their central view. However, given the decision today in light of such a sharp deterioration in the near-term outlook, it seems likely that there will be no policy adjustment in September and October.Westpac's central case remains that by the November Board meeting, the recovery will be underway, particularly supported by widespread vaccination, and it would then be appropriate for the Board to scale back its purchases to a 3bn weekly pace.We remain comfortable with our view that the Board will begin raising the cash rate in the March quarter of 2023 and are encouraged by the improved medium-term outlook in the RBA's forecasts for unemployment, inflation, and economic growth."
A lot will depend on the trajectory of the virus situation in Australia over the coming weeks/months. While the RBA did not take a dovish step today, it could be akin to one of the many times where they are caught "falling behind the curve".
That said, if the virus spread is relatively contained and restrictions are able to be eased going into Q4, then there is an argument for the RBA to stick with its current policy stance but the underlying risks still remain until vaccinations pick up further.
In short, the RBA did not adopt a rather "safe than sorry" approach but rather took a chance on the probability that the virus situation will improve in the weeks ahead.
Only time will tell if they have gotten this right or if they are slow to get off the mark, again.
