MNI PREVIEW: RBA To Hold As Virus Lockdowns Hit Victoria

The Reserve Bank of Australia is set to keep monetary policy unchanged Tuesday, despite a resurgence of the coronavirus in some parts of the country, with focus on how policymakers address the fresh challenges the economy will likely face in coming months if further lockdowns occur.

In the month since the previous policy decision, Melbourne has been hit with a renewed outbreak of infections which are set to impact the strength of Australia's nascent recovery.

RBA Board member Ian Harper told MNI this week that the situation in Melbourne was a "significant danger" to the Australian economy.

Harper, Dean of the Melbourne Business School and Co-Dean of the University of Melbourne's Faculty of Business and Economics, said that even if the latest outbreak was contained to the state of Victoria, "it will slow the national recovery given the relative size of the Victorian economy."

"This is a significant danger the more widely it spreads," said Harper, speaking in a private capacity and not as an RBA Board member.

AUSSIE DOLLAR

The resurgent Australian dollar has been a point of focus for some, although the RBA seems more relaxed and Governor Philip Lowe has said recent currency gains were reasonable.

Harper, in his comments to MNI, said the bank would need to learn to live with the effects of a stronger currency, adding that there was "not much, if anything" the RBA could do.

AUGUST SOMP

The RBA will release its quarterly Statement on Monetary Policy on Aug 7 and this will contain new economic forecasts factoring in the resurgence of the virus and its impact on the economy, along with the stronger dollar.

Any change in outlook is expected to be reflected in the RBA commentary published alongside Tuesday's policy decision.

Recent language from the central bank has been cautiously optimistic, suggesting that the impact of the pandemic, particularly on the labour market, has not been as bad as originally feared. But this view may change in the new public health environment.

The RBA last cut rates to a record low 0.25% in March, also announcing a bond buying program to target a yield of 0.25% on the benchmark Australian Government three year bond.

It also introduced a A$90 billion Term Funding Facility (TFF) designed to facilitate low cost lending by commercial banks to smaller businesses.

Since then, the Bank has been consistent in its messaging that it sees its policies being transmitted as designed, complementing the Federal Government's AUD259 billion fiscal stimulus package.