RBA Sees Australia Bouncing Back, Will Act If Virus Worsens

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Reserve Bank Governor Philip Lowe signaled he’s looking through the current outbreak of the delta strain of the coronavirus that’s shuttered Australia’s largest cities, while signaling a willingness to respond if the health situation worsens.

Policy makers “are prepared to act in response to further bad news on the health front that affects the outlook for the economy over the year ahead,” Lowe said in his opening statement to a parliamentary panel as he began three hours of testimony Friday.

But for now, the central bank is sticking with its planned tapering of bond purchases as it wagers the economy will recover rapidly from a virus-induced contraction this quarter. About two-thirds of the population is in lockdown as the delta variant spreads, with Sydney the epicenter of the outbreak and Melbourne also enforcing stay-at-home orders.

The RBA said additional bond purchases now would mainly help the economy next year, when it would already be recovering, making government spending a quicker and better option.

“Fiscal policy is the more appropriate instrument for providing support in response to a temporary and localized hit to income, and the board welcomes the substantial fiscal response by governments in Australia,” Lowe said.

Prime Minister Scott Morrison late last month announced additional funding for smaller businesses impacted by the lockdown to reach as much as A$100,000 ($74,000) a week, along with increased welfare payments for lower-income workers who have lost pay. His government is now spending about A$750 million a week on support for New South Wales, he said at the time.

The RBA, in its quarterly Statement on Monetary Policy also released Friday, said the economy’s near-term outlook is highly uncertain, adding that output is expected to contract by at least 1% in the current quarter.

RBA Releases Detailed Economic Forecasts in Quarterly Statement

“As a rough rule of thumb, household consumption in areas that are locked down is typically around 15% cent lower than it would be otherwise,” Lowe said in his testimony. “In addition, the lockdowns have directly affected construction activity in New South Wales and delayed some investment plans.”

Faster Inflation

Asked by a lawmaker whether the central bank would try to make up for several years of undershooting its 2-3% inflation target by letting consumer prices grow faster, the governor said his focus at the moment was still on trying to get it back to that range.

“I want to assure you that once we get to 2.1% we’re not going to say job done, and that does carry a risk that, not a risk an opportunity maybe, that inflation will be higher than 2.5, maybe even 3 for awhile,” he said. “That’s beyond my term as governor but as an individual citizen I would be perfectly comfortable with that.”

The RBA’s decision to push ahead with its tapering plans reflects an underlying view that with the currency down over 6% in the past five months and yields lower, the economy has plenty of support.

Asked about the difficulty of keeping the currency contained when much of the world wanted a lower exchange rate, Lowe said that was one of the reasons the bank had undertaken quantitative easing.

He said the bank was constantly watching what its overseas counterparts were doing and if Australia had failed to operate QE, the currency would’ve been more prone to appreciation.

The Australian dollar edged a little lower in response to the comments and was trading at 73.86 U.S. cents at 12:05 p.m. in Sydney.

A key factor likely underpinning the RBA’s confidence in the resilience of the recovery is the improving jobs market, with the jobless rate hitting a decade-low 4.9% in June, just before widespread lockdowns. While employment could take a hit as the economy contracts, the RBA said it expects unemployment to fall to 4.25% by the end of next year and 4% by the end of 2023.

“One source of uncertainty is the possibility of vaccine-resistant virus strains emerging over time,” Lowe said. “Another is that it is still unclear what type of adjustments our society will have to make to live with Covid on an ongoing basis.”

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