MNI STATE OF PLAY: RBA Dilemma As Lockdowns Threaten Rebound

The Reserve Bank of Australia meets Tuesday as Sydney remains in the grip of a full lockdown for at least another month, with policymakers facing a dilemma of whether or not to respond to a resurgence of the pandemic with a tweak in either policy or outlook.

This week's policy meeting is the first since the two largest states of New South Wales and Victoria were forced into lockdown as the spread of the Delta variant of the coronavirus and will see the board looking back on the upbeat outlook in July, when it laid down plans to starting winding in key easing policies, as MNI wrote on July 27 (MNI INSIGHT: Lockdowns could Delay, Not Derail Australia Rebound).

MNI understands the bank's view is that the lockdown will have delayed but not derailed the recovery, and while this may not result in direct policy measures this week there could be another change in language around the timing of the next interest rate rise.

But the RBA's optimism at the July meeting, and the belief that the Australian economy was recovering faster than expected, will have been tested by subsequent events with the lockdown reportedly set to cost the economy AUD10 billion based on KPMG analysis.

The bank could also choose to increase its bond purchases from the current AUD4 billion a week, but a formal extension of the yield target to the November 2024 bond series is unlikely .At its previous meeting, the RBA elected not to extend its yield target to government bonds maturing in November 2024, also announcing it would reduce its purchases of other longer dated government bonds from AUD5 billion a week to AUD4 billion until November, whilst tweaking its guidance language on interest rates, saying that it was now unlikely that conditions would justify a rise in interest rates from the current record low of 0.10% until 2024.

For much of 2021 the bank has said these conditions would not be met "until 2024 at the earliest" and it may revert to this earlier language this week.

INFLATION SURPRISE

Headline inflation data for the second quarter was published last week, with a surge to 3.8%, well above the upper limit of the central bank's 2 to 3% target range, but the RBA expects higher prices to only be a temporary phenomenon. The key measure for the RBA was the trimmed mean which came in at 1.6%.

The RBA's optimism at the July meeting, and the belief that the Australian economy was recovering faster than expected, will have been tested by subsequent events with the lockdown reportedly set to cost the economy AUD10 billion based on KPMG analysis.

MNI understands the bank's view is that the lockdown will have delayed but not derailed the recovery, and while this may not result in direct policy measures this week there could be another change in language around the timing of the next interest rate rise.

The bank could also choose to increase its bond purchases from the current AUD4 billion a week, but a formal extension of the yield target to the November 2024 bond series is unlikely.