What to expect from the July RBA meeting | Item
What about asset purchases?
The next decision the RBA will have to make at this July meeting is what to do when the second block of A $ 100 billion asset purchases is completed in September this year.
The options available here are more numerous and include:
- Completely cease asset purchases;
- Repeat an additional AUD 100 billion over the next six months, then review;
- Make a smaller amount (say AUD50bbn) over the next six months, then revise;
- Repeat an additional AUD 100 billion but over a longer period, say 12 months, then revise.
We consider option a unlikely. The simple statement “The Council continues to give high priority to the return to full employment“That immediately followed the June policy decision makes it clear that until further progress is made on full employment, some asset purchases will persist. This therefore suggests a choice between options two, three and four.
Option two is our current preference. This would be the simpler choice because it avoids any hint of cutting, which the Fed is still thinking about, and thus prevents the RBA from looking hawkish about the Fed. This potentially leaves the RBA looking a bit more accommodating than the US Fed in early 2022, when we believe an effective reduction in the US will take place. But it also leaves open the possibility of signaling a future slowdown in the pace of asset purchases at one of the RBA meetings towards the end of the year, which could narrow the distinction.
Both options three and four could be seen by the market as a de facto “tightening”, making them more difficult to implement, especially this month. The reality, however, is that both options still represent gradual easing, just at a slower pace. Given Australia’s current Covid difficulties and the uncertainty this creates, we believe it is likely more difficult for the RBA to market such a change at this meeting. However, if we don’t see option two, our preference goes to option three, as it ties the hands of the RBA for a shorter period of time than option four.