Australia Central Bank Set to Defer Bond Taper, Survey Shows

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Australia’s central bank is likely to push back its planned taper of bond buying, just four weeks after announcing it, as prolonged lockdowns triggered by the delta virus variant look set to send the national economy back into reverse.

Thirteen of 18 economists polled by Bloomberg expect the Reserve Bank will delay its planned reduction in weekly purchases to A$4 billion ($3 billion) from A$5 billion at Tuesday’s meeting. Indeed, Westpac Banking Corp. maintains they should increase buying to A$6 billion through to November. The taper is currently due to begin in September and be reviewed a couple of months after that.

Sydney’s monthlong lockdown has now been extended until late August as authorities fail to flatten an outbreak of daily Covid-19 cases that on Wednesday hit another record. All but one economist expected gross domestic product would fall this quarter, with the New South Wales government now extending its harshest lockdown restrictions beyond southwest Sydney.

“There is still considerable uncertainty over the length of the lockdowns across the country -- notably, the seven-day moving average of new local cases in NSW is still increasing,” said Besa Deda, chief economist at St. George Bank. The RBA will be “walking back from the previous taper announcement.”

Sydney is caught in a perfect storm as the highly contagious delta variant combines with the southern hemisphere winter to infect a population with a low vaccination rate due to a sluggish rollout.

Australia’s economy will shrink by 2.7% this quarter, Commonwealth Bank of Australia estimates, slightly higher than the 2.4% contraction forecast by Bloomberg Economics.

Those forecasts reflect the dramatic change in the outlook since Australia became one of the first nations to recoup output and employment lost in 2020. Unemployment had fallen to 4.9% in June, a decade low, and was headed toward the RBA’s target of around 4%, where it expects wage growth to begin to take hold.

RBA Governor Philip Lowe is hoping economy-wide pay gains will eventually return inflation to its 2-3% target on a sustainable basis.

The RBA, also at this month’s meeting, decided against extending its yield-target horizon from the current April 2024 security.

What Bloomberg Economics Says

“We remain of the view that the RBA is unlikely to lift rates until 2024, and that the roll forward of the yield target to the November 2024 bond remains a risk.”

-- James McIntyre, economist

Commonwealth Bank on Wednesday pushed back its call for the RBA to begin raising rates to May 2023 from a previous November 2022 and forecasts the jobless rate will peak at 5.6% in October.

Westpac, in a research note Thursday, forecast the economy would contract by 2.2% in the current quarter and job losses would reach over 200,000. The economy is then expected to bounce back by 3% in the final three months of the year with jobs recovering by over 180,000.

Many of the respondents said the government is best placed to deliver the support needed for the economy to cope with the latest outbreak.

“The heavy lifting remains on fiscal policy,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “It is far better suited to delivering timely, targeted, and impactful support tailored to Covid-19-induced circumstances which continue to change.”

©2021 Bloomberg L.P.