RBA’s bond move has post-Covid intentions

IN the words of Maggie Thatcher, Reserve Bank governor Philip Lowe was not for turning. The Reserve Bank has stuck to its – entirely sensible – decision to trim its bond purchases to $4bn a week.

For the first time, though, it said those purchases would continue “until at least mid-February 2022”. Previously, it had only committed to the buying until November.

RBA: one; three of the four big bank economists: zero.

That’s the three bank economists – ANZ, CBA and above all Westpac – who predicted the RBA would reverse its previously stated decision to trim its purchases from $5bn to $4bn a week.

Why “above all” Westpac? Because Westpac’s Bill Evans not only forecast the RBA would reverse its decision, but would actually shift to increasing its purchases to $6bn a week.

Evans had made that same prediction for the RBA’s August meeting, and had been wrong; and he stuck with it again for the September meeting.

The economists didn’t only get the basic prediction wrong; they demonstrated a more telling failure to understand the RBA’s thinking and how it saw the interplay between the politics of lockdowns (in NSW and Victoria) and the emerging economic reality.

They also missed the rather basic point that the difference between the RBA buying $4bn and $5bn of bonds each week makes four-fifth of five-eighths of very little difference to businesses that are battered and bruised by lockdowns and people losing their jobs or being stood down.

Indeed, it makes even less difference precisely because of those lockdowns.

The governments of NSW and Victoria are prohibiting people from spending; so, what on earth would the RBA playing around in the sophisticated money market do to offset that?

If the actions of and the pain caused by the NSW and Victorian governments need to be offset, and to keep the 15 million people in those two states spending in the areas they are allowed to spend, the offset has to come from income support from the federal government.

Not the RBA, because it quite simply can’t.

It cannot be done by the RBA twiddling the esoteric area of bond-buying; especially when the RBA would only be twiddling at the margin anyway.

In a broader sense, the RBA is endorsing and relying on the national plan that should see lockdowns end or at least dramatically curtailed as we hit those 70/80 per cent vaccination targets.

So yes, the (overall national) economy will shrink by at least 3 per cent in this current quarter – with falls more like 6-7 per cent in Victoria and NSW – but that it will spring back in the December quarter.

That’s, critically, assuming that the lockdowns in Victoria and NSW only last through October at the worst.

I’m a tad more pessimistic – or realistic – about the authoritarian instincts of especially one of those premiers in particular. I can see some degree of lockdown extending into and through November.

But even if that’s the case; even if we get a “second successive quarter of negative growth”, there is precious little the RBA could do about it. Other than to keep buying bonds, as it intends, to indirectly fund the federal budget deficit.

In a much broader and more fundamental sense, we really are hitting the “crunch point”. We either move into a “post-Covid” reality or we cling to the fantasy that we can “solve everything” by having lockdowns and never-ending massive government spending and money printing.

The RBA reversing its intended trim would have played into that fantasy.

The bottom line is that we are going to have to bite the bullet and “do a UK”. That’s live with the virus and the vaccine. With governments backing off spending and the RBA actually thinking about returning interest rates to something akin to normality.