Fundamental Updates – Dovish Tapering Locks In QE (08 September 202

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The dovish tapering decision.

During its monetary policy decision yesterday, the Reserve Bank of Australia (RBA) kept its cash rate unchanged at 0.10%. As promised, the central bank proceeded with its quantitative easing (QE) tapering plan announced back in the July’s meeting. What came as a surprise is the duration of the new round of QE. Previously, the RBA opted for a two-month QE duration. But during the announcement yesterday, the central bank decided to extend the duration by five months instead. Thus, the tapered A$4 billion QE will run from September until at least February 2022.

As a result, the Australian dollar strengthened for a brief period of time before weakening across the board, reflecting the dovishness as a result of the extension of the QE duration.

Delta variant still a concern to the RBA.

Despite RBA Governor Lowe saying previously that fiscal policy will prove to be more effective than monetary policy in providing aid at the moment, this does not deter the central bank from making a more cautious decision. As explained in the rate statement, the RBA’s decision to extend the QE duration “reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak”.

Rate hike remains out of sight.

As with the previous meetings, the RBA continues to reiterate that its cash rate will not be increased until inflation falls within the 2-3% target range and this condition will not be met before 2024 based on their current projection.