Philip Lowe, governor of the Reserve Bank of Australia, who announced just a month ago that he was going to cut the size, may face the embarrassment of having to postpone the plan. The resurgence of the COVID-19 epidemic has left central banks around the world still confused about the economic outlook.
Lowe expects to postpone its plan to scale back its weekly bond purchases until later this year, while keeping cash interest rates at 0.1%, according to the vast majority of 18 economists surveyed last week. Two of the economists went further, expecting the RBA to move bonds anchored in a three-year yield target to Treasuries maturing in November 2024.
The reason why the RBA is expected to delay the reduction plan is related to the outbreak caused by the Delta mutant strain. The sudden rise in infections has significantly changed Australia's economic growth prospects from optimistic expectations of a rapid recovery to bleak prospects for long-term blockades and economic contraction.
"the development of the recent epidemic and increased uncertainty suggest that the optimistic scenario of code reduction starting in September is being challenged," said Royal Bank of Canada.Su-Lin Ong, head of Australian economics and fixed income strategy.
"continuing to buy bonds at the current rate of A $5 billion a week, while the impact may be limited, is an important sign that the Australian federal and state governments, the RBA and local banks are working together again," she said.
It has been five weeks since Sydney implemented the home order, but the outbreak caused by the Delta strain has set a record in recent days. Sydney accounts for 1/4 of the country's GDP and more than 1/5 of the employed population, so the RBA is likely to adjust its forecast before updating its quarterly forecast on Friday.
The Commonwealth Bank of Australia and Westpac Bank expect the unemployment rate to rise from the current 4.9% to 5.7% as a result of the epidemic. The two banks expect lost jobs to return once the epidemic is contained and vaccination intensifies.
The blockade in Sydney highlights Australia's zero-case strategy and slow vaccination. The Australian economy has been at the forefront of the global recovery and is on track to meet the unemployment target of about 4 per cent of Lowe. The Lowe hopes that unemployment at this level will accelerate wage growth and stabilize inflation within the RBA's target range of 2-3 per cent for some time.
Now, on the contrary, the likelihood of another contraction is increasing. In this context, even if the reduction is small, and there is still plenty of evidence that the Australian economy is far from needing a lot of support, it will send conflicting signals.