RBA Prepared to Act if Virus Spread Sets Back Australia Recovery

(Bloomberg) --

The Reserve Bank of Australia said it will continue to review its bond-buying program based on economic conditions and the health situation as the nation faces lockdowns to combat the delta variant of coronavirus.

“The board would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery,” the RBA said in minutes of its August meeting released in Sydney Tuesday. “Experience to date had been that, once virus outbreaks were contained, the economy bounced back quickly.”

The central bank had presented a bullish statement two weeks ago in which it stuck with a planned tapering of bond purchases and predicted the economy would bounce back quickly from a Covid-induced contraction this quarter. Yet Sydney’s virus cases are still climbing and Melbourne and Canberra have had to extend their respective lockdowns.

The board “considered the case for delaying the tapering of bond purchases to A$4 billion a week currently scheduled for September,” the minutes showed. The RBA is currently buying A$5 billion ($3.7 billion) a week under its quantitative easing program.

The Australian dollar slid immediately after the release before regaining some ground to trade at 73.13 U.S. cents at 12:21 p.m. in Sydney.

But the RBA noted that the outlook for the economy was for a resumption of strong growth in 2022 and judged that any additional bond purchases would have their “maximum effect at that time,” with only a marginal effect at present when the extra support is needed, the minutes showed.

The RBA estimates household spending drops about 15% during lockdowns. Data from the Commonwealth Bank of Australia signals consumption is falling.

Household spending intentions in July posted year-on-year declines in most categories for the first time since the start of pandemic, Australia’s largest lender said in a statement Tuesday.

The RBA reiterated in its release that fiscal policy is a “more appropriate instrument” for providing support in response to a temporary, localized reduction in incomes, the minutes showed.

“Given these considerations, the board reaffirmed the previously announced change in the rate of bond purchases,” it said.

©2021 Bloomberg L.P.