Australia’s central bank prepared to intervene if Covid lockdowns harm the economy

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Minutes from Australia’s central bank’s August meeting revealed on Tuesday that the bank would be willing to take policy action if coronavirus lockdowns across the country threatened a deeper economic downturn. As the delta variant spreads, that conclusion looks increasingly plausible, putting pressure on the Reserve Bank of Australia (RBA) to delay or perhaps lessen a scheduled tapering of its bond-buying program.

The local dollar fell a quarter of a cent to $0.7308 on the prospect of more stimulus, while 10-year bond rates fell to near seven-month lows of 1.16 percent at its Aug. 3 meeting, the RBA Board expressed optimism that the economy would soon rebound once the coronavirus quarantine was lifted. As a result, it has chosen to keep to its goal of reducing weekly bond purchases from AU$5 billion to 4 billion Australian dollars ($2.94 billion).

However, minutes revealed that the bond-buying strategy would be reviewed as the health crisis progressed. “Should further bad news on the health front result in a more serious setback for the economic recovery,” the minutes stated, “the Board would be prepared to act.”. Since, the news is indeed constantly terrible, with lockdowns extending from Sydney to Canberra, and then 2,500 kilometers further to the Northern Territory.

Authorities have imposed a curfew in Melbourne as they try to halt the spread of the delta variety. Two-thirds of the country’s 25 million people are effectively shut out, and entire sections of the retail and service industries have shut down.

Economists have slashed their economic forecasts in response, making the RBA’s recent promise of 4% growth for 2021 look increasingly implausible. “Lockdowns are likely to have a very acute impact on the economy, much more than what the RBA had penciled in only a week ago,” warns NAB economist Tapas Strickland.

Covid catastrophe payouts to those who have lost jobs or hours worked have reached 1.2 million people, or about 9% of the workforce, prompting Strickland to predict an increase in unemployment to 5.6 percent in September, up from 4.9 percent now.

By the conclusion of the year, the RBA predicted a 5% unemployment rate. According to Westpac’s senior economist Bill Evans, the GDP would decline by a whopping 2.6 percent this quarter before rebounding by Christmas as vaccination rates reach 70 percent. “Under these estimates, the Australian economy grows by 2.4% in 2021, down from 3.2% in our earlier forecast,” said Evans.