MNI INSIGHT: RBA Baseline Forecasts Still Current In Lockdowns

The Reserve Bank of Australia would begin to revise its baseline economic forecasts if the current pandemic lockdowns continue into the fourth quarter of 2021, MNI understands.

Current conditions in the Australian economy are still within the parameters of the RBA's baseline scenario which has inflation at 2.25% at the end of 2023, setting the scene for a 2024 rate rise, as reported: MNI: RBA Policy View Expects Bounceback From Recent Lockdowns.

The RBA's quarterly Statement on Monetary Policy, released last week, included forecasts on a baseline scenario where the largest city of Sydney was locked down until the third quarter of the year, and Melbourne and other cities experienced intermittent lockdowns.

INFLATION VIEWS

The RBA's inflation target is in a range of 2% to 3%, and the bank has said inflation has to be "sustainably" within this range before it would consider raising interest rates from the record low of 0.10%.

RBA Governor Philip Lowe told a parliamentary committee last week that the bank could even tolerate inflation of over 3%, although this would prompt monetary tightening.

MNI understands that if the Sydney lockdown continues into the fourth quarter of the year, then the RBA would consider revising its forecasts towards what it called the "weaker path" in the SoMP.

Under this scenario, inflation is forecast to be 1.5% by December 2023, significantly lower than the RBA target.

JOBS AND GDP

MNI understands the RBA is expecting a short-term spike in unemployment and a hit to GDP in the third quarter, but a strong rebound when the lockdowns end. The RBA has consistently said policy is based on a rebound once lockdown conditions ease, but has also suggested there could be other scenarios.

The RBA is aware that the New South Wales state government has a different attitude towards lockdowns and is more inclined to open the economy then in Victoria, where the government has been much stricter.