The Reserve Bank of Australia (RBA) has refused to respond to spiralling lockdowns in the eastern states, as it sticks to its schedule and begins to taper its quantitative easing (QE) program.
Convening on Tuesday for its September meeting, Governor Philip Lowe announced the central bank would cut its $5 billion a week bond buying habit to $4 billion as previously planned.
While New South Wales, Victoria and the ACT grapple with ongoing lockdowns, Lowe noted there had been “considerable momentum” prior to these outbreaks.
“This setback to the economic expansion is expected to be only temporary. The Delta outbreak is expected to delay, but not derail, the recovery. As vaccination rates increase further and restrictions are eased, the economy should bounce back,” Lowe said.
Economists at Westpac, ANZ and the Commonwealth Bank had been expecting the RBA to plow on with $5 billion a week purchases, with Westpac going one further and calling for QE to be upped to $6 billion. Of the big four, only NAB had expected the RBA Board to stay the course.
The RBA will continue with $4 billion in purchases each week until “at least February 2022” however. In recognition of “the increased uncertainty associated with the Delta outbreak” the schedule will be reviewed again in February, with any bounce back expected to be “slower” than experienced last year.
“GDP is expected to decline materially in the September quarter and the unemployment rate will move higher over coming months. While the outbreak is affecting most parts of the economy, the impact is uneven, with some areas facing very difficult conditions while others are continuing to grow strongly,” Lowe said.
The reduction in bond purchases isn’t expected to have substantial impacts, with the decision having more to do with messaging, according to the Royal Bank of Canada (RBC).
“We think the RBA would prefer to continue to gradually shift away from ultra-accommodative policy settings consistent with a similar shift globally,” RBC head of Australian strategy Su-Lin Ong said.
“But we acknowledge that it is a close call with challenging lockdown optics and ongoing uncertainty.”
As widely expected, the official cash rate was kept on hold at 0.10% for its ninth month in a row, with virus outbreaks only expected to further delay normalising monetary policy.
“The lockdown, and its hit to economic activity, has further delayed the time when the effective RBA conditions – full employment and 3% or more wages growth to sustain 2-3% inflation – will be met to justify a rate hike,” AMP Capital chief economist Shane Oliver said.
Some expect inflation will force the RBA’ to break its promise to wait until 2024 before raising rates, but that a hike is at least another two years away.
It may be good news for home owners, with separate analysis suggesting 15% would be unable to absorb rising repayments.
In the meantime, the challenge will be to alleviate the enormous pressure being faced by Australian businesses
“As the duration of lockdowns increases so does business uncertainty – this is the biggest enemy we confront through the remainder of 2021,” CreditorWatch chief economist Harley Dale said.
“[These are] difficult lockdown conditions most Australian businesses are currently experiencing. The number of defaults is rising. Meanwhile, the number of credit enquiries is falling, and as a key indicator of business conditions, this metric highlights the challenges SMEs will face through the remainder of 2021.”