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The Reserve Bank of Australia expects that lockdowns to contain the delta variant of Covid-19 could delay recovery and cause the economy to contract in the third quarter, before a rebound on the back of improving world demand, MNI understands.

An update on the RBA's outlook is expected at next week's board meeting, where the market should learn more on whether the bank believes that a delay in the recovery will have an impact on policy. Currently it expects to maintain interest rates at a record low 0.1% until 2024, after earlier saying rates would stay unchanged until 2024 "at the earliest".

For rates to rise, inflation has to move sustainably from an annualised 1.1% now into the 2% to 3% target range driven by wages growth of around 3%.

The two largest state economies of Victoria and NSW are in lockdown and most state borders closed, with the RBA expecting the lockdown to continue for weeks but not months. An economic recovery then could be delayed, but not derailed as previous indications showed resilience.

The economy should bounce back upon re-opening, aided by more positive global conditions which might help soften the value of the AUD while maintaining demand for exports.

FINANCIAL SUPPORT, MONETARY POLICY

The central bank does not expect widespread layoffs during this lockdown, partly due to prompt action by the federal and state governments in announcing financial support for workers and businesses. Relatively low unemployment, which had come down sharply to 4.9% before the delta variant struck, should also buoy recovery after the lockdowns.

At its most recent meeting before the lockdowns, the RBA decided against extending its yield target to November 2024 government debt and cut purchases of other bonds to AUD4 billion from AUD5 billion per week, saying this would be reviewed in November.

EXTENT OF LOCKDOWNS

Since then, the lockdowns are forecast to cost the economy AUD10 billion, according to KPMG, which modelled the impact based on a 40-day lockdown in Sydney and 10 days in Victoria. This would slash at estimated 1.5 percentage points off third quarter growth.

Sydney is currently in the thirtieth day of lockdown and there is no firm date for it to end.