RBA puts faith in post-virus rebound even as lockdowns tighten

The Reserve Bank has put its faith in the country bouncing back strongly from restrictions that have the nation’s two largest economies in lockdown, saying it would only intercede if there was more “bad news” on the national health front.

As spending data collected by the Commonwealth Bank showed sharp falls in consumer spending ahead of the statewide lockdown of NSW, minutes of the RBA board’s last meeting confirmed its sanguine economic outlook.

Melbourne’s Southbank precinct in lockdown. Despite the depth of measures to stop the current virus spread, the RBA believes the economy will recover strongly.Credit:Eddie Jim

The board held its last meeting on August 3 when NSW reported 233 cases and Victoria had zero. At that meeting, the bank defied market expectations by sticking to its announced plan to gradually wind back its purchases of government debt to $4 billion a week from early September.

Since then, NSW cases have climbed sharply, reaching 452 on Tuesday, while up to 15 million people in major centres including Sydney, Melbourne and Canberra are in lockdown.

The minutes show the RBA board believed fiscal policy was the best way to deliver assistance at the moment in the face of the pandemic.

Only if the situation deteriorated would the bank be prepared to abandon its plans to wind back its quantitative easing program.

“The board would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery,” the minutes showed.

The bank, which is forecasting GDP to grow by 4 per cent through 2022 and 2.5 per cent in 2023, said it expected the economy to bounce back from the current lockdowns.

“Experience to date had been that, once virus outbreaks were contained, the economy bounced back quickly. The vaccination program would assist with containment of the virus and longer-term economic recovery,” the minutes showed.

“Although uncertainty had increased, the central scenario was still that the Australian economy would grow strongly again next year.”

Earlier this month, RBA governor Philip Lowe was challenged by Labor frontbencher Andrew Leigh about the bank’s plans to wind back its bond buying program as coronavirus case numbers were starting to climb.

“Reducing the bond purchasing program is effectively tightening monetary policy,” Dr Leigh said on Tuesday. “I’m bewildered that the RBA thinks this is the right time to tighten monetary policy.”

Westpac chief economist Bill Evans has described a key argument of the Reserve Bank as “bizarre”.Credit:Lisa Maree Williams

Westpac chief economist Bill Evans said the minutes suggested that the bank, which has stated it is responding to actual levels of wages growth and inflation rather than forecasts, is responding to forecasts around the impact of lockdowns on economic activity.

Westpac now believes the September quarter national accounts will show the economy contracting by 2.6 per cent and grow by the same amount through the final three months of the year.

Mr Evans said the country now faced the “bizarre development” of the bank at its meeting next month ignoring the short-term economic impacts of the lockdown by winding back its quantitative easing program.

“An even deeper near term hole, which now seems certain, would only prompt a change in policy if doubt was cast on the pace of recovery,” he said.

The impact of the lockdowns is growing, with the Commonwealth Bank reporting a nationwide 5 percentage point drop in spending growth over the past week based on its network of credit and debit cards.

NSW dropped by 3 percentage points (after falling over recent weeks) while Victorian spending tumbled by 20 percentage points as the state went into lockdown. There are also signs of a slowdown in Tasmania and South Australia while Queensland rebounded by 8 percentage points as restrictions there were eased.

Online spending and purchases of food through supermarkets continue to be strong but expenditure on all types of services, from personal grooming to eating out, have fallen.

Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.

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