The lockdown in Sydney is about to push the Australian economy into contraction this quarter. Despite this, however, the Reserve Bank of Australia (RBA) said it will stick with its planned tapering of bond purchases.
Governor Philip Lowe and his board surprised economists on Tuesday by sticking to their plan to reduce the pace of weekly bond purchases to A$4 billion ($3 billion) in September from A$5 billion now. That is while maintaining the cash rate at 0.1%. After this, the Australian currency rallied.
In a statement, the central bank governor said that the experience to date has been that once virus outbreaks are contained, the economy bounces back quickly. He said the economy is benefiting from significant additional policy support. The vaccination program will also assist with the recovery, he added.
There is confidence that with the Australian dollar down about 7% in the past five months and lower yields, the economy has plenty of support. It is likely to bounce back fast once restrictions lift.
When it comes to unwinding stimulus, Lowe also made clear that he doesn’t want to get ahead of the Federal Reserve. Chair Jerome Powell has said that there’s still some way to go before a U.S. tapering.
Lowe said that the board will maintain its flexible approach to the rate of bond purchases. The program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target, he said.
Australian Dollar Rallies
On Tuesday, the Australian dollar edged higher after this surprise from the country’s central bank. The economy is likely to recover quickly once coronavirus lockdowns ease.
The Aussie gained 0.6% to $0.7404. This comes after the RBA said it would trim its weekly bond-buying in September as planned. Lockdowns in major cities are likely to trigger a sharp contraction in the economy this quarter. Due to this, many analysts had expected them to postpone the tapering.
Lowe said that prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year, he said.
From a previous 3.5%, the RBA forecast economic growth of just over 4% in 2022. Unemployment is also likely to drop to 4% by the end of 2023.