It’s been said that conducting monetary policy at the best of times is like driving at night in torrential rain with a fogged and cracked windscreen. The headlights are also out and windshield wipers were an option that you just couldn’t afford.
It’s like that at the moment for the Reserve Bank of Australia. A fierce storm has been whipped up by the sudden shutdown of Sydney due to a significant outbreak of Covid-19 cases. It has regrettably introduced the city to the highly contagious Delta variant, bringing with it harsh mobility restrictions, with troops now on the ground to enforce compliance.
New South Wales is an island for now, with borders to other states slammed shut.
Sydney is shut in until the end of August, according to the latest plans, but there’s little optimism that will be the end of things. Without a sharp move down in the daily case count in the next few weeks, containment strategies that are already on the drawing board for September and beyond will be further honed.
Despite the gloom around third-quarter gross domestic product, there remains hope that when case numbers do finally drop, there will be a spectacular bounce in economic growth, hiring will gather a second wind, and the grim days of July and August will be potholes in the rear-view mirror.
Moreover, you won’t find any economist in Australia who doesn’t think 2022 will be a year to behold economically. If vaccination rates continue to build strongly, the economy will roar again next year, stoked by fiscal stimulus, a huge pool of unspent domestic savings, and interest rates as low as anybody is ever likely to see again.
All this is cause to retain some optimism, but it doesn’t diminish the considerable uncertainty that the Reserve Bank of Australia sees ahead. It will be revising down GDP-growth forecasts ahead of its policy meeting on Tuesday and — more agonisingly for the central bank — it will be revising up its end-of-year forecasts for unemployment.
Around the RBA’s board table on Tuesday, various options will be discussed. Given the magnitude of the hit to GDP growth in the third quarter, it seems unlikely the central bank will remain mute.
As a safeguard, it can delay its plans to reduce the value of government bonds it buys each week under its quantitative easing program. Delaying the so-called taper from September until November or even February would clearly signal that the RBA is alert to the risks growing around the economic outlook.
Critics of the idea argue that suspending the taper would be tokenistic and achieve little in regard to saving jobs and restoring GDP growth.
But central bank signalling is often more important than what it actually does. If the RBA indicates to markets and the broader community on Tuesday that it can be flexible in how it conducts policy, it will send ripples of reassurance to businesses at a time when it is most needed.
Coupled with the announcement of added fiscal stimulus this week, suspending the RBA’s taper will signal that those at the steering wheel of economic policy aren’t deaf to what could still be a devastating time for small businesses and workers through the second half of the year.
Economists are beginning to estimate the likelihood of a double-dip recession in Australia with Sydney, a key driver of economic activity, in a long-term lockdown.
Shane Oliver, chief economist at AMP Capital Markets puts the risk currently of growth in both the third and fourth quarters contracting at 25%. A one-in-four probability isn’t something to be ignored. It could rapidly rise if case numbers climb further in Sydney, or if the virus spreads to other states again.
Caution should be driving the RBA’s decision making at the moment. Signalling is everything, and flexibility will be welcomed.
The Wall Street Journal
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