Interest Rate Rises Will Now be Delayed Due to Lockdowns

The ongoing lockdowns in several Australian cities and regions to contain the spread of the delta variant of the COVID–19 virus will negatively impact economic activity, with these lockdowns expected to hit economic growth by around $10 billion in the third quarter.  This estimate is obviously subject to change depending on the extent and duration of the lockdowns especially those in NSW, but the effects will be significant and probably mean Australian GDP growth in the third quarter turns negative.

The lockdowns will almost certainly delay the RBA’s future tightening of current monetary policies, which will result in lower interest rates for longer than previously expected.  In the short term, with Australia’s official cash rate at its effective low of 0.10%, the only available tool the RBA can use to further support the economy will be through the central bank’s bond purchase program.  

The RBA stated during its meeting in early July “Given the high degree of uncertainty about the economic outlook, members agreed that there should be flexibility to increase or reduce weekly bond purchases in the future, as warranted by the state of the economy at the time”.  This will allow the RBA the necessary leeway to increase rather than taper its bond purchase (QE Program) reversing its previously announced plans to begin tapering its bond purchases in September by scaling back its weekly purchases from $5 billion to $4 billion.  Further confirming this potential change in direction Governor Lowe recently foreshadowed a change by saying “We are not locked into any particular path and bond purchases could be scaled up again if economic conditions warranted it”.

The RBA, as well as the federal and state governments, remain strongly committed to support the economy whilst Australia’s vaccination rollout ramps up.  Monetary and fiscal policies will be heavily influenced by the length of the lockdowns and their impact on economic activity and jobs.  Lockdowns to combat the latest outbreaks have already caused a significant setback to Australia’s economic recovery.  The full effects are as yet unknown, but we can probably predict with greater certainty that interest rates are less likely to be increased before 2024 than was the case a month ago.

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