Australia’s historic low official cash rate has been kept on hold, with the RBA saying the Delta outbreak has caused the economic recovery to lose momentum.
The Reserve Bank of Australia has kept the official cash rate at a historic low and extended its bond buying program in response to the Delta outbreak, saying the highly infectious variant had caused the nation’s economic recovery to lose momentum.
The central bank reiterated on Tuesday it would not increase the cash rate – the interest rate on unsecured overnight loans between banks – from 0.1 per cent until actual inflation was sustainably within the 2 to 3 per cent target range, which it does not expect to happen before 2024.
“Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently,” governor Philip Lowe said.
“Prior to the Delta outbreak, the Australian economy had considerable momentum.
“The recovery in the Australian economy has, however, been interrupted by the Delta outbreak and the associated restrictions on activity.
“GDP is expected to decline materially in the September quarter and the unemployment rate will move higher over coming months.”
The Delta “setback” was expected to be only temporary, he said, delaying but not derailing the economic recovery.
“As vaccination rates increase further and restrictions are eased, the economy should bounce back,” Dr Lowe said.
“In our central scenario, the economy will be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year.”
While the RBA has pulled back bond buying from $5bn per week to $4bn per week from this month, the program has been extended until at least February, Dr Lowe also announced.
He said the purchases were providing substantial and ongoing support to the Australian economy, and the extension reflected the delay in the recovery and the increased uncertainty around the Delta outbreak.
CommSec chief economist Craig James said the RBA board would continue to do everything in its power to support the Australian economy over the recovery and expansion phases.
“While the RBA believes that the best short-term support will come from governments (fiscal policy), today it extended the timeframe for bond purchases in order to keep borrowing costs ultra low for Aussie households and businesses, ensuring that there is an abundance of liquidity in the economy as government bond issuance eases,” Mr James said.
“The stimulative conditions will provide support for the sharemarket.
“Growth-focused and high-yielding stocks will be favoured over banks and safe-haven sectors.”
CreditorWatch chief economist Harley Dale noted the RBA wouldn’t lift the cash rate “for a substantial time against the background of the seemingly endless lockdowns”.
“As the duration of lockdowns increases, so does business uncertainty – this is the biggest enemy we confront through the remainder of 2021,” Mr Dale said.
“At some point though, economic conditions will be ripe for a strong recovery and businesses across all industries will need a strategy to leverage the opportunities that will present themselves.
“That seems a long way off right now, but it will happen and businesses will do well to be prepared.”