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RBA sticks to cautious taper plan as Delta overtakes the economy

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The Reserve Bank of Australia pressed ahead with the cautious rollback of its bond-buying program, underscoring its confidence in the economic recovery prospects once a virus wave subsides.

Governor Philip Lowe and his board of directors said they will buy A $ 4 billion ($ 3 billion) in government bonds a week through at least mid-February, up from A $ 5 billion previously. The central bank originally planned to review the program in mid-November.

Ten out of 16 economists had expected the central bank to stop the throttling because of closings in the country’s largest cities. As expected, the RBA left its key rate at 0.1%.

The extension of the purchases until at least mid-February “reflects the lag in economic recovery and increased uncertainty surrounding the Delta eruption,” Lowe said in a statement on Tuesday. “The board of directors will continue to review the bond purchase program in view of the economic and health conditions.”

The decision is made because the delta variant of the coronavirus is proving to be far more difficult to contain than expected, forcing the lockdowns in Sydney and Melbourne to be extended. Australia’s economy will contract sharply this quarter and economists are also downgrading fourth quarter growth estimates.

Westpac Banking Corp. now sees that growth this year will be undone by Delta.

The Australian dollar rose briefly before giving up gains and falling as the market’s focus shifted from tapering to extending the buying period. The Aussie was trading at 74.21 US cents at 3:58 p.m. on the day of the week in Sydney, a relatively limited range. The S&P / ASX 200 hasn’t changed much, as have bond yields.

“They eat their cake and eat it too,” says Phil Odonaghoe, economist at Deutsche Bank AG. “I call it a moderate taper. Expectations were somewhere between 50 and 50 as to whether or not they would continue with the taper and the RBA seems to be trying to accommodate both camps. “

The story goes on

By sticking to its taper plans, the RBA largely stuck to its view that the economy has sufficient support to recover. A lower currency, low bond yields, and stronger state and state support are already cushioning the effects of the virus.

What Bloomberg Economics Says

“The decision is a case of ‘less is more’. While the central bank stuck to its July throttling decision, by extending the time it continues to buy A $ 4 billion a week in bonds, it will end up buying more than originally planned in July. A further reduction is likely in February, but unlike elsewhere where a reduction in bond purchases means a reduction in some provisions, in the case of Australia the RBA will adjust its purchases to reflect the reduction in bond supply as the budget situation improves. “

–James McIntyre, economist.

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Australia’s inability to keep the delta under control is repeated in developed countries around the world, causing major monetary authorities to remain cautious about plans to exit stimulus packages. Federal Reserve chairman Jerome Powell said the Federal Reserve could start slowing asset purchases this year if the economy recovers, although Friday’s weak labor report itself could call that goal into question.

The RBA estimates household spending will decrease by about 15% during the lockdown, and Sydney is in its 11th week of stay-at-home orders. Business confidence has fallen and household sentiment has weakened.

Delay does not derail

“This setback in economic expansion is expected to be temporary,” Lowe said in his statement. “The delta eruption is likely to delay recovery, but not derail it.”

For the time being, the labor market is holding up, with unemployment falling to 4.6% in July, its lowest level since 2008, although the decline was mainly due to lower activity rates. The unemployment rate is expected to rise again to over 5% in the coming months.

Australia’s Covid Zero policies are under pressure as the states of New South Wales and Victoria abandon efforts in favor of vaccination rates of 70% to 80%, which imply reopening and learning to live with the virus. This has added further complications as states differ on how to handle the virus, a lack of coordination pointing to delays in reopening borders.

“In our central scenario, the economy will grow again in the December quarter and is expected to return to its pre-delta path in the second half of next year,” said Lowe.

(Updates with comments from economists.)

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