The Reserve Bank of Australia debated suspending a planned reduction in its weekly government bond buying program at its policy meeting Tuesday, but elected to allow fiscal stimulus to do the heavy lifting of the economy as the country faces a potential plunge back into recession amid a worsening Covid-19 outbreak.
In a testimony before parliament on Friday, RBA Gov. Philip Lowe said the central bank’s board was willing to adjust policy settings, if conditions in the economy continue to deteriorate over the coming months.
The RBA announced in early July that it planned to reduce its government bond buying in September from 5 billion Australian dollars a week down to A$4 billion a week. That announcement was made before the extension of lockdowns in key cities such as Sydney and Melbourne to contain the Covid-19 outbreak.
“At the Board’s meeting earlier this week we considered the case for delaying this tapering to $4 billion a week…We will keep the situation under review and are prepared to act in response to further bad news on the health front that affects the outlook for the economy over the year ahead,” Mr. Lowe said.
Mr. Lowe said he was confident the economy wouldn’t slide back into recession, but added that he couldn’t rule it out.
If the RBA moved to cancel its taper plans in September, it would add stimulus to the economy just as economic activity was bouncing back, Mr. Lowe added.
“We are expecting a return to strong growth next year. Any additional bond purchases would have their maximum effect at that time and only a very small effect right now when the extra support is needed most,” Mr. Lowe said.
“The Board also recognized that fiscal policy is the more appropriate instrument for providing support in response to a temporary and localized hit to income, and the board welcomes the substantial fiscal response by governments in Australia,” he added.
Last week, the federal government announced more funding support for firms and workers affected by the lockdowns.
RBA board member Ian Harper told The Wall Street Journal this week that the economy was set to contract sharply in the third quarter given that activity in key cities like Sydney and Melbourne has been shut in to contain the spread of the Delta variant.
The lockdown in Sydney, which accounts for around 25% of national output, will run until the end of August. But with case numbers worsening, and regional areas of New South Wales now affected, there is low confidence that the lockdown will be lifted as scheduled.
Australia also has a low vaccination rate, but the recent spread of the virus has encouraged many to get vaccinated. Still, it is likely to be early 2022 before vaccination levels reach thresholds that might encourage the lifting of mobility restrictions.