Australia’s Central Bank Holds as East Coast Reopening Looms

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Australia’s central bank kept its monetary settings unchanged, betting there’s enough stimulus to foster an economic recovery ahead of a gradual reopening of Sydney and Melbourne as vaccination rates climb. 

Reserve Bank Governor Philip Lowe kept the cash rate at 0.1% -- as expected -- at Tuesday’s meeting. Lowe cut weekly bond purchases to A$4 billion ($2.9 billion) last month, while pushing out their next review to mid-February to help cushion the economic impact of lockdowns along the nation’s east coast. 

“This setback to the economic expansion in Australia is expected to be only temporary,” Lowe said in a statement. “As vaccination rates increase further and restrictions are eased, the economy is expected to bounce back.”

Lowe maintained his upbeat outlook for the economy as Sydney prepares to ease restrictions following a 15-week lockdown to contain an outbreak of the delta variant. New South Wales’ state vaccination rate is closing in on 70%, the first condition for easing, with further reopening at 80%. The governor said the uncertainty lies in the pace and timing of the bounce-back.

Financial regulators are grappling with how to contain surging credit and a red-hot property market without choking off the economy’s recovery. The RBA has said consistently it doesn’t expect to raise rates until 2024 at the earliest -- leaving tighter lending rules as the only way to rein in the property market. 

“The Council of Financial Regulators has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates,” Lowe said. “In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate.”

The RBA is due to release its semi-annual Financial Stability Review on Friday and lending and housing are likely to feature prominently.

What Bloomberg Economics Says

“Monetary policy normalization remains a long way off in Australia, and that poses a challenge for policy makers as housing markets respond to low borrowing rates. Our reading of the RBA’s post-meeting statement suggests a likely move in coming months to make borrowers prove they can meet higher borrowing rates when applying for loans.”

-- James McIntyre, economist. Read full note here   

The rapid house-price gains in Sydney and Melbourne come despite protracted lockdowns, and as growing household debt raises financial stability issues. The RBA has ruled out tightening policy to cool asset prices -- unlike South Korea, and as New Zealand’s central bank appears set to do at tomorrow’s meeting -- focusing instead on pushing the economy to full employment.

Lowe today noted contrasting effects on the labor market from the lockdown and the prospect of an easing of the curbs. Hours worked slumped almost 4% in August, he said, while adding that business liaison suggested many firms want to hire workers ahead of the expected reopening this month and next.

The central bank’s quantitative easing program is designed to help keep a lid on the currency to avoid it hurting jobs and growth. It has proven successful with the Aussie dollar down 5% in the past six months even as Australia posted a record trade surplus in August, fueled by surging commodities.

©2021 Bloomberg L.P.