RBA likely to bench QE taper

For now, the RBA is keeping watch, knowing the clampdown in Sydney could tip the economy into reverse in the third quarter and erode confidence in hiring. Picture: NCA NewsWire/Joel Carrett

The lockdown crippling Sydney looks set to extend indefinitely, sharply increasing the risk the Reserve Bank will have to suspend plans to taper its bond buying in September.

If the lockdown were to end on June 16 as previously scheduled – before it was extended by two weeks on Wednesday due to persistently high coronavirus case counts – the RBA would almost certainly press ahead with its scheduled reduction in bond purchases to $4bn a week from $5bn currently.

But this suspension of personal liberties and normal business operations looks grimmer than previous lockdowns, which were short and followed soon thereafter by quick rebounds in economic activity. Relying on experiences following past lockdowns to guide the way might well be a flawed strategy for the central bank right now.

The aim of the lockdown isn’t to bring case numbers under control in Sydney, it is to take them to zero. Add in the suspicion authorities were too slow to react to the health threat when it first emerged last month, and the community is looking down the barrel of a protracted health crisis.

While case numbers have plateaued somewhat over the past week, they remain high, and the number of highly contagious individuals still active in the community is of deep concern.

Growing pressure on the NSW government to clamp down harder on mobility is reflected in the Australian Medical Association’s call on Friday for the immediate closure of all non-essential retail outlets, non-essential services and a review of limits on how far people can travel from their homes.

Australian Medical Association president Omar Khorshid. Picture: NCA NewsWire / Gary Ramage

“Rising unlinked cases and people infectious in the community show we are not ahead of this outbreak,” said AMA president Omar Khorshid. “This means there is no end to the lockdown in sight and more needs to be done,”

The warning highlights the reality that the planned lifting of the five-week lockdown at the end of this month will almost certainly be overrun by stubbornly high case numbers, with authorities struggling to root out the Delta strain of the Covid-19 virus. This was followed on Saturday by a raft of stricter measures announced by the state government, including the closure of non-essential retail.

For now, the RBA is keeping watch, knowing the clampdown in Sydney, which accounts for about 25 per cent of national output, could tip the economy into reverse in the third quarter and erode confidence in hiring.

If Sydney is still in lockdown in mid-to-late August, the RBA will be dealing with crunched business and consumer confidence and mass lay-offs of workers in the country’s biggest city. Victoria is also locked down, which means about half the working population of Australia could be offline in the coming weeks.

To be sure, while the RBA could back away from its taper in September, it isn’t about to ramp up its bond buying. That would be an emergency option only.

The RBA is putting added faith in the idea the community is better equipped to deal with lockdowns, so there should be an end to the current one in a reasonable time frame – and any lost output in the third quarter could be won back in the fourth quarter.

Just before Sydney’s lockdown, Australia’s unemployment rate had fallen to a decade low of 4.9 per cent in June. So if the economic pilot light in Sydney can be relit soon, it isn’t unlikely that the upward trajectory of growth would be restored quickly.

Another plus is the situation has spurred an acceleration of national vaccination rates. But for now, less than 15 per cent of the population is fully vaccinated.

RBA Governor Philip Lowe has a coffee mug on his desk marked by a line that reminds him it is half full, not half empty. That sense of optimism continues to pervade the RBA amid the lengthening crisis. But it could vanish quickly if the Sydney lockdown extends into August.

Dow Jones Newswires