MNI INSIGHT: Delta Variant Worries RBA Ahead Of Key Meeting

Fresh Covid-19 outbreaks and the slow pace of Australia's vaccine rollout are having more of an impact on the economy than the Reserve Bank of Australia expected when it made its most recent forecasts in May, weighing on its calculations as it considers an extension of its yield guidance, MNI understands.

The prospect of further lockdowns will be a major factor in next week's RBA board meeting, set to be the most important so far this year as it decides on how to continue its bond buying program and also on whether to extend its yield target to bonds maturing in November 2024.

The RBA's forecasts rely on a baseline scenario in which GDP growth would be 4.75% by the end of this year and 3.5% by the end of 2022, but this assumed only isolated lockdowns. About half of the country's population now faces multi-day lockdowns after outbreaks of the Delta variant of the virus in several states.

WEAK WAGES GROWTH

The baseline forecast was for unemployment to move from 5% to 4.5% and trimmed mean inflation from 1.5% to 1.75% over the same period.

The bank will base its decisions next week on its view of the likelihood of raising interest rates in 2024, assuming that wages growth gain momentum and inflation is within its 2% to 3% target range.

MNI understands that while the bank was surprised on the upside by recent labour force data, with unemployment falling to 5.1% in May from 5.5.%, it has significant concerns over weak wages growth.

Annual wage growth was 1.5% in the first quarter, only marginally higher than the record low 1.4% in the last quarter of 2020.

The RBA has said it believes wages growth should be around double these levels to generate inflation in its target range.