Australia Central Bank Expected to Hold as Virus Crisis Spirals

Australia’s central bank staff will look to factor in the latest of the spiraling Covid crisis into economic projections ahead of Tuesday’s policy meeting and Friday’s forecast publication.

Reserve Bank Governor Philip Lowe will keep interest rates and the three-year yield target unchanged at 0.25%, surveys show, and reiterate a readiness to resume buying government bonds in the event conditions worsen. Yet, bank economists will be grappling with the fluid situation in Melbourne — home to about 20% of Australians — as they prepare the bank’s quarterly forecast update.

The Victorian state capital is amid a six-week lockdown that could be extended with daily new infections elevated. “This will have clear negative implications for the economy,” said Commonwealth Bank of Australia’s Gareth Aird. “We suspect the better news on the spread of Covid‑19 in Australia, excluding Victoria, will largely be offset by the situation in Metropolitan Melbourne.”

Australia suffered its worst day of infections Thursday with Victoria recording 723 new cases, dashing hopes the outbreak was coming under control and sapping the confidence that was gradually returning.

The RBA’s quarterly Statement on Monetary Policy is due Friday at 11:30 a.m., with Assistant Governor Luci Ellis, the bank’s chief economist, delivering a speech shortly after that’s likely to address the vagaries of forecasting in such an uncertain period.

Treasury, in a fiscal and economic update two weeks ago, estimated Victoria’s restrictions would cut economic growth by around 0.75 percentage point in the third quarter.

After an initial flurry of activity — injecting liquidity, cutting rates, setting the yield target and buying bonds — the RBA has sat tight for the past three months. In its July meeting, the board discussed alternative policies it could have pursued, including taking the cash rate and yield target to 0.10%. The bank concluded it had followed the right path and no further action were required in the current circumstances.

Still, with a deflationary pulse emerging, lifting real interest rates, and the currency on a tear, monetary conditions are tightening.

Friday’s release “will be one of the most eagerly anticipated RBA publications of this year,” said Josh Williamson, a senior economist at Citigroup Inc., who notes the early reopening of the economy, extension of the stimulus and large drawdowns from pension funds should see forecast upgrades.

“The risk is that the return to a hard lockdown in Greater Melbourne and decision by the Queensland premier to close the border to residents of Greater Sydney tips the RBA into not upgrading,” he said.

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