Australia's central bank ready to act if lockdowns threaten economy

The chance of fresh stimulus saw the local dollar slip a quarter of a cent to US$0.7308. PHOTO: REUTERS

SYDNEY (REUTERS) - Australia's central bank would be prepared to take policy action should coronavirus lockdowns across the country threaten a deeper economic setback, minutes from its August meeting showed on Tuesday (Aug 17).

That outcome now looks ever more likely as the Delta variant spreads, piling pressure on the Reserve Bank of Australia (RBA) to delay a planned tapering of its bond-buying programme, or even to ease.

The chance of fresh stimulus saw the local dollar slip a quarter of a cent to US$0.7308 while 10-year bond yields dropped to near seven-month lows at 1.16 per cent.

The RBA board had been optimistic at its Aug 3 meeting that the economy would recover quickly once coronavirus lockdowns relaxed. As a result, it decided to stick with plans to trim its weekly bond buying to A$4 billion (S$3.97 billion), from the current A$5 billion pace.

Yet minutes showed it would also continue to review the bond-buying plan as the health situation developed.

"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 minutes showed.

Since then, the news has been consistently bad as lockdowns spread from Sydney to the capital of Canberra, and a further 2,500km to the Northern Territory.

Melbourne has been put under curfew as the authorities struggle to stem the spread of the Delta variant. Two-thirds of the nation's 25 million citizens are effectively shut in, and whole sectors of retailing and services are closed.

Economists have responded by slashing their economic outlook, leaving the RBA's recent prediction of 4 per cent growth for this year looking increasingly untenable.

"Lockdowns are likely to have a very acute impact on the economy, much more than what the RBA had pencilled in only a week ago," warns National Australia Bank economist Tapas Strickland.

Covid-19 disaster payments to those losing jobs or hours worked have gone out to 1.2 million people, or more than 9 per cent of the workforce, leading Mr Strickland to forecast a jump in unemployment to 5.6 per cent next month, from the current 4.9 per cent.

The RBA had forecast a jobless rate of 5 per cent by year end.

Westpac's chief economist Bill Evans now sees the economy contracting by an eye-watering 2.6 per cent this quarter before rebounding by Christmas as vaccination rates top 70 per cent.

"Under these estimates the Australian economy grows by 2.4 per cent in 2021, down from 3.2 per cent in our earlier forecast," said Mr Evans.

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