Don’t Throw in Towel, Implores RBA. Delta Will Dent But Not Derail Rebound
(Bloomberg Opinion) -- The Reserve Bank of Australia sent a reassuring — and surprising — message to pessimists fretting that the global rebound’s glory days are behind it. Covid-19’s delta variant will likely deal only a temporary setback to the expansion and it would be wrong for policy makers to shelve preparations to trim stimulus.
Officials stuck with their plan to soon begin winding back quantitative easing despite projections the Australian economy will shrink this quarter. A wave of lockdowns, concentrated in Sydney, is behind the dour short-term outlook. The slump is also likely to be short-lived, in the Reserve Bank’s estimation. The RBA said Tuesday it still intends to pare the pace of bond buying to A$4 billion ($2.9 billion) a month from September, down from the current A$5 billion, a timetable foreshadowed last month.
Governor Philip Lowe was careful to keep his options open: Purchases will be regularly reviewed and the bank will assess where things stand in November. That shouldn’t subtract from the startling nature of the decision. Most economists anticipated that the blow to business from the lockdowns would force the RBA to suspend plans to taper QE. There was even speculation the bank might increase QE. It’s a rare central bank that’s prepared to buck forecasts; authorities tend to shy away from surprising markets lest any upheaval derail their broader strategy.
You have to admire Lowe’s courage. He is effectively saying there’s no reason to panic just because things start to look a bit hairy after a strong growth spurt. The battle against Covid will continue to be one of fits and starts. Keep the broad goal in mind and only depart from script when you can be confident that staying the course would inflict greater damage. That threshold doesn’t seem to have been crossed for the RBA. “The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly,” Lowe said in a statement.
It’s not a danger-free approach. The whole gist of monetary and fiscal policy in the pandemic era has been about pivoting early and erring on the side of doing more, not less. That’s a lesson officials took away from the global financial crisis of 2007-2009, when they were criticized for arriving late, in insufficient force and then going wobbly when conservative politicians started talking about austerity.
A volte-face today would have been embarrassing but justified. After six months of mostly good Australian and global economic news, the picture has become more complicated. The delta variant is damping prospects for revival in important parts of Asia and spreading worryingly in the U.S.
China, the only major economy to manage any growth last year, is wrestling with a slowdown in growth and fresh Covid outbreaks. The People’s Bank of China last month cut the level of reserves that banks are required to hold and may do so again before year-end. The International Monetary Fund last week held its 2021 global growth forecast steady at 6% — an impressive pace, but a status-quo projection that followed a series of upgrades. The fund decried the uneven distribution of the rebound, given many emerging markets have underperformed.
Australia has made its own mistakes. A botched vaccine rollout meant delta crashed over the country’s shores when only a small portion of the population of 25 million was inoculated. That’s a debacle not of the central bank’s making. Prime Minister Scott Morrison will wear responsibility for that. Nevertheless, there are implications for the RBA. Like Morrison, the bank has been bullish on Australia’s prospects, reasonably so: GDP had recouped pandemic losses, employment was regularly exceeding forecasts and China, the dominant economic force in the region, bounced back vigorously from a slump last year. The coast seemed clear to nip and tuck at the edges of the RBA’s emergency programs.
The bank’s approach was hard to seriously fault at the time. The taper acknowledged progress made since last year’s slump, but was incremental enough to avoid disruption and was flagged well in advance. Sound familiar? The Federal Reserve is tiptoeing toward a tapering decision of its own. Economists foresee an announcement toward the end of the year with the actual moves beginning in December or January.
The global recovery isn’t over and there’s nothing in Lowe’s statement to suggest he sees the situation as remotely that grave. Nevertheless, the easy stage of the recovery has passed. It gets trickier now. Policy may yet need to move as quickly and unpredictably as Covid-19.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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