RBA to cut bond buying program by 20% after a month

The Reserve Bank of Australia (RBA) will trim its bond purchase program by 20% after a month despite the need for more liquidity in a system which has been hit hard by the COVID-19 pandemic.

The Australian central bank said that it will purchase government securities at the rate of AU$5 billion a week until early September and then truncate it by 20% to AU$4 billion a week until at least mid-November. The move took the market by surprise – which were expecting the RBA to up the bond purchase programme by 20%.

The move is seen as a push by the RBA towards moving ahead with its plans to scale back its extraordinary monetary stimulus, even as economy seems to be badly hit by the COVID-19 pandemic.

Justifying its move, the RBA said that it has experienced that once virus outbreaks are contained, the economy rebounds quickly.

“Prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year. The economy is benefiting from significant additional policy support and the vaccination program will also assist with the recovery,” RBA Governor Philip Lowe said in his post-meeting statement.

Disappointed with the move, the ASX200 was down 0.39% after the decision was made public. Shares of the big four banks that had rallied yesterday, were in the red as well: Commonwealth Bank of Australia (ASX:CBA) was down 0.13%; Westpac Banking Corp (ASX:WBC) was down 0.94%; ANZ Banking Group Ltd (ASX:ANZ) was down 0.85%; and National Australia Bank Ltd (ASX:NAB) was down 0.89%.

On the other hand, as expected, the RBA did not tinker with the overnight cash rate – which remains unchanged at near-zero level 0.1%.

The central bank said that it expects the economy to grow by a little over 4% in 2022 and by around 2.5% in 2023.

On the inflation front, the RBA wants to see inflation sustainably between its 2% and 3% guidance band before lifting the cash rate above its current historic low.

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