Australia Sticks With Taper Plan Even as Virus Dents Economy

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The Reserve Bank of Australia said it will stick with its planned tapering of bond purchases even as Sydney’s protracted lockdown is set to shrink the economy this quarter.

The Australian dollar advanced after Governor Philip Lowe and his board surprised economists by keeping to their plan to reduce the pace of weekly bond purchases to A$4 billion ($3 billion) in September from A$5 billion now, while maintaining the cash rate at 0.1% on Tuesday.

“The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly,” Lowe said in a statement. “The economy is benefiting from significant additional policy support and the vaccination program will also assist with the recovery.”

The surprise decision to hold firm on the tapering plans reflects an underlying confidence among policy makers that with the currency down about 6% in the past five months and yields lower, the economy has plenty of support and is likely to rebound fast once restrictions lift.

Lowe has nonetheless made clear that he doesn’t want to get ahead of the Federal Reserve when it comes to unwinding stimulus, with Chair Jerome Powell saying there’s still some way to go before a U.S. tapering. The conditions for an interest rate increase, meanwhile, are still not expected to be met before 2024, Lowe said.

“The board will maintain its flexible approach to the rate of bond purchases,” the RBA governor said. “The 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 Australian dollar climbed after the announcement, buying 74.05 U.S. cents at 3:06 p.m. in Sydney from around 73.70 cents prior to the release.

What Bloomberg Economics Says

“The RBA is unlikely to tamper further with their proposed tapering unless there is a substantial lift in yields, appreciation of the currency, or deterioration of the fiscal position. We remain of the view that the cash rate is likely to remain on hold until late 2024.”

-- James McIntyre, economist

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Lowe’s announcement comes three days before he’s due to appear before a parliamentary panel and the central bank releases its update of quarterly forecasts.

“The economic outlook for the coming months is uncertain and depends upon the evolution of the health situation and the containment measures,” the governor said. The RBA’s central scenario is for the economy to grow by a little more than 4% in 2022 and by around 2.5% in 2023, he said.

Rather than focusing on the implications of the lockdowns for overall growth, some economists have been looking more at the likely employment fallout. The nation’s two largest lenders expect unemployment to jump to 5.6%-5.7% in coming months from the current 4.9%.

“Some increase in the unemployment rate is expected in the near term due to the current lockdowns, but most of the adjustment in the labor market is likely to take place through a reduction in hours worked and in participation,” Lowe said. “In the central scenario, the unemployment rate continues to trend lower next year, to be around 4.25% at the end of 2022 and 4% at the end of 2023.”

The central bank reiterated that it expects a pickup in both wages growth and underlying inflation, but this is likely to be only gradual.

Record Infections

Sydney has been hitting record daily infections despite five weeks of strict stay-at-home orders. The city accounts for 25% of Australia’s output and 22% of employment. The crisis reflects a tardy vaccine roll-out that’s left the population vulnerable to the highly contagious delta variant during the southern hemisphere winter.

Australia had been a leading light in the global recovery and was on track to achieve Lowe’s goal of around 4% unemployment. At that point, he anticipated wage growth would begin to take off and help return inflation to the RBA’s 2-3% target.

Yet it’s not all doom and gloom in Australia. Outside Sydney, the economy is motoring along and labor markets are still tightening. Australia has also been buoyed by a surge in the price of iron ore, its largest export.

“One source of uncertainty is the behaviour of wages and prices at the low levels of forecast unemployment, including because it is some decades since Australia has sustained an unemployment rate around 4%,” Lowe said.

©2021 Bloomberg L.P.