The delta variant could be a game-changer for the Reserve Bank’s monetary stimulus plans, with the central bank prepared to provide more support if there is a significant setback to the recovery.
Any move to reverse a July decision to scale back weekly bond purchases would likely require the economic shock to flow into 2022, given the RBA believes that’s when further buying will have “maximum effect”.
“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,” minutes of the bank’s August 3 board meeting said.
Since that meeting, NSW extended the lockdown of Greater Sydney to the entire state, Melbourne’s stay-at-home orders were extended, and virus cases were detected in Canberra and the Northern Territory.
RBA governor Philip Lowe told Parliament this month the bank’s central scenario for the economy assumed Sydney’s lockdown would last until the end of September. That outcome is looking optimistic.
“We’re assuming case numbers will go up,” NSW Premier Gladys Berejiklian said on Tuesday, more than seven weeks after the first case was reported.
“[September and October] will be our most difficult months. The challenge for us as a team and a government in NSW will be how can we keep our citizens safe and as free as possible during those difficult months.”
The cost of lockdowns is expected to surge past $20 billion with an extension of Greater Sydney’s stay-at-home orders to the end of September, and top $25 billion if they run through to late October, further deepening the third quarter economic contraction, and putting a question mark over growth in the fourth quarter.
Commonwealth Bank senior economist Kristina Clifton said Australia’s largest bank now expected the lockdown of Greater Sydney to run “until mid-November, when a large proportion of the population is vaccinated”.
The RBA surprised economists in July when it announced it would scale back its bond buying program from $5 billion to $4 billion when the $200 billion, 12-month buy-up ends in September.
It surprised again when it decided to push ahead with the tapering at its August meeting, despite the protracted lockdown in NSW.
Members did consider delaying the tapering, the minutes said.
“They noted that the outlook for the economy is for a resumption of strong growth in 2022. Members judged that any additional bond purchases would have their maximum effect at that time, with only a marginal effect at present, which is when the extra support might be required.”
But a “significant” deterioration in the economy could change that outlook.
“The bond purchase program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target,” the minutes said.