The Reserve Bank of Australia (RBA) was expecting a continued strengthening of the country’s economy. Then it could go ahead with reducing the number of bonds it was buying every week. During the central bank’s July 6 policy meeting, its policy Board deemed that the economy, the labour market, in particular, has gotten better than analysts expected.
Due to the positive outlook, it decided to reduce bonds to A$4 billion ($2.94 billion) from $5 billion per week. However, some of Australia’s states are currently under lockdown. That includes Australia’s most populous Sydney, facing its harshest restrictions since the pandemic began last year.
Moreover, business activities in New South Wales, Victoria and South Australia are halted. With that, the RBA might have to reconsider and reverse its decision to taper its bond-buying programme.
Commonwealth Bank of Australia economist Gareth Aird wrote that the near term economic outlook has deteriorated since the July Board meeting.
He said that with the unforeseen nature of events regarding the spread of COVID‑19 and the lockdowns, they now expect the RBA to reverse the decision to taper the bond-buying program from mid‑September. That is if greater Sydney and/or Victoria are still in lockdown at the time of the August Board meeting.
The Board should meet on Aug 3. The minutes of its July meeting, which happened on Tuesday, highlighted the flexibility around its bond-buying programme, ANZ Banking Group economist David Plank said. It was a signal the Board will revisit its taper decision in August, he said.
Overall Confidence Index Drop amid Lockdowns
Tuesday saw a sharp deterioration in sentiment on the national economic outlook, based on the ANZ’s latest survey of consumers. The overall confidence index slumped to the sharpest since March 2020, at 5.2%. The hardest hit was the buying intentions for major items.
Most analysts forecast that Australia’s economy will shrink in the third quarter. It is going to be its first contraction since June 2020. This prediction led to the discussion about taper reversal.
Westpac chief economist Bill Evans said an appropriate response from the RBA Board would temporarily lift bond purchases to A$6 billion. That is over the September to November period.
Such a move, Evans said, would help recognise the flexibility of the RBA’s stimulus programme and support the ongoing economic recovery.