Today’s monetary policy meeting of the Reserve Bank would normally have been a low-key event after all those decisions from the July meeting to keep the cash rate at a record low, to maintain its yield control bond buying on the April, 2024 bond and to reduce the $5 billion a week bond buying to $4 billion a week until at least mid-November.
But the return of Covid – this time the Delta variant and lockdowns in Sydney – the new one in southeast Queensland and the now ended smaller lockdowns in Victoria and South Australia – have changed the meeting’s importance.
Yesterday’s news of another solid rise in house prices in July (and so far this year) in metro and regional markets won’t be a front of mind issue for the RBA while the situation in NSW and Queensland remains difficult (See below).
At the same time the Federal Government extended aid packages to domestic aviation sector until November and December – a sign Canberra is not expecting a rapid recovery in activity in the economy.
While no significant change in policy will be revealed, some economists think the bank could make it clear that the weekly bond buying (based on the 10-year bond yield) will continue into 2022 and not be wound back, as was looking possible in November.
Other economists think the November end date for the bond buying nominated in the July statements from the RBA and governor Philip Lowe will probably be retained, but subject to review later this year once the progress of the hard lockdown in Sydney is seen.
The bank and Federal Treasury believe the economy will bounce back once the long Sydney lockdown ends, but with a new clamp in southeast Queensland, a strong rebound later this year is looking uncertain.
Unlike 2020, consumer confidence seems to be weaker and less resilient this year, especially with the dithering over vaccines, vaccination rates and the failure of some governments (NSW) to respond to the latest outbreak with alacrity.
The AMP’s chief economist, Shane Oliver says that with the NSW lockdown now extended to the end of August, the total direct cost of the lockdowns since end May has now been pushed to around $14 billion and with less time to now rebound at the end of the current quarter.
“The further boost to government support costing about $1billion a week – with bigger payments to NSW businesses contingent on them maintaining their workforces and payments to workers who have seen their hours of work reduced by at 20 hours a week equivalent to what they would have received from JobKeeper in the middle of last year – will help but will mainly serve to enable the economy bounce back quickly,” Dr Oliver wrote.
But Dr Oliver said that the impact of the slide in household consumption (which started in June, at the end of the previous quarter0 will see growth contract by up to 2% (instead of the 0.7% estimate 10 days ago).
“Even though other states are likely to keep growing (helped by the ending of the Victorian and South Australian lockdowns) GDP is now expected to contract by around -2% or so this quarter,” Dr Oliver forecast.
“That said providing the lockdown ends this quarter (and the Victorian and SA experience highlight that lockdowns do still work against the Delta variant) we should see a strong rebound in the economy in the December quarter aided by pent up demand from another round of government support payments,” he added.
“In the meantime, the set back to growth this quarter is likely to push unemployment back up to around 5.25-5.5% in August and September which will keep the RBA cautious and likely to delay the tapering of its bond buying program.”
“Of course, the longer the lockdown drags on the great the risk of the December quarter GDP contracting too. But at this stage we continue to put the risk of a fall back into recession at just 25%. Fortunately, enhanced government support has helped offset the increased risk posed by the extension of the lockdown,” Dr Oliver wrote.
Moody’s said in a note on Friday that “the RBA is likely to reverse its decision to taper its bond purchases from September in light of the increasing economic costs posed the domestic outbreaks.”
“The Delta-driven localized outbreaks have triggered significant movement restrictions of varying intensity and duration on some of the populous states, disrupting the recovery momentum and threatening to undo the sizeable progress made toward employment revival.”
Given the increasing speculation about the health of the economy, Governor Lowe can expect some close questioning when he appears before a key House of representatives Committee on Friday. It will be a virtual appearance.
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Meanwhile Australian house prices rose for the 10th month in a row in July, according to yesterday’s report from CoreLogic.
Including regional dwelling prices, the average price rose by 1.6% from June and are up 16.1% on a year ago, their fastest pace since 2004.
Average capital city prices are now 11.6% above their previous record high in September 2017, and they are now up 16% from their recent low last September.
The rise was down from the record 2.8% rise in June, thanks in part of the impact of the widening Sydney lockdown and the brief shutdown in Victoria.
While down from the break neck pace of 2.8% seen in March, price growth is still very strong. But Sydney prices were still up 2% and Melbourne prices rose 1.3%. Canberra was the strongest metro market with a rise of 2.6%.
Regional dwelling prices rose 1.7% in July and are up 19.6% on a year ago with their relative strength over the last year thanks to less exposure to Covid, the slump in immigration, better affordability and increased buyer interest as people seek to relocate from cities as part of a secular trend towards working from home and a greater focus on lifestyle.
