As Australia’s COVID-19 lockdowns continue, will the RBA chuck it in reverse?
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While the Delta variant wrecks havoc with Australia’s east coast, near-term growth projections for the economy are being rapidly wound back.
Similarly to last year’s bull run, the ASX has more or less shrugged off any looming discrepancy between stocks and economic growth as the local index climbed to new record highs in August.
But with little end in sight to the current lockdowns, CBA says it could prompt a change in the current assumptions surrounding the RBA’s monetary policy outlook.
Economist Kristina Clifton provided an update on the bank’s view following the release of the RBA’s minutes from its August meeting yesterday.
The meeting was held on August 3, and Sydney’s COVID-19 crisis has continued to escalate in the intervening fortnight.
The minutes showed the RBA expected lockdowns to extend through the September quarter, with less severe restriction measures in some areas thereafter.
With two weeks of hindsight, Clifton says those assumptions “look more and more optimistic as time goes on”.
CBA is now working to the assumption that greater Sydney lockdowns will extend until November, and will only ease when data confirms that a “large proportion” of the population has been vaccinated.
In the August minutes, the RBA reiterated its view that fiscal policy should assume the brunt of the load in shielding the economy from short-term lockdown impacts.
But while the Sydney situation continues to deteriorate, Clifton said the monetary policy outlook is also the source of conjecture.
Specifically, Clifton said the focus will be on the RBA’s tapering plans for its bond purchase program, which is currently running at $5bn per week.
As it stands, the RBA’s current plan is to dial that back to $4bn, starting next month.
At the same time, RBA committee members hedged their bets slightly on the near-term outlook, conceding there was now a “high degree of uncertainty for the second half of 2021″.
In that context, “the bond purchase program will continue to be reviewed in light of economic conditions and the health situation”.
Clifton was more direct, positing that there is now a “clear risk” that the RBA will reverse its tapering plans at the next meeting in September.
However, she noted that the impact on the economy of buying $4bn/week versus $5bn/week will be “very small”.
On the big ticket item — interest rates — CBA said the Delta lockdowns have also had a material bearing.
In late July, CBA economist Gareth Aird pushed out his fall for the first interest rate hike until May 2023, after previously forecasting that rates would have to start rising late next year.