RBA minutes reveal Delta’s grip on the economy

  • By Zilla Efrat

The Reserve Bank of Australia (RBA) has decided to taper its bond purchases from $5 billion to $4 billion per week until at least mid-February 2022 as the Delta variant of COVID-19 continues to stymie an economic recovery, according to its latest board meeting minutes.

It will also not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. “The central scenario for the economy is that this condition will not be met before 2024,” the minutes from the September 7 board meeting state.

While private demand increased solidly in the June quarter, the minutes reveal that the spread of the Delta variant of COVID-19 in New South Wales and Victoria has set back Australia’s economic recovery and created uneven conditions across states and industries.

As a result, the GDP is expected to decline materially in the September quarter and the unemployment rate is expected to rise.

The board says the outbreak of the Delta variant has delayed, but not derailed, the recovery. As vaccination rates rise and restrictions are eased, it says the economy is expected to bounce back.

However, the timing and pace of the recovery are likely to be slower than experienced earlier in 2021.

“In the central scenario, the economy would return to growth in the December quarter and to its pre-Delta path in the second half of 2022,” the board says.

Wage growth and underlying inflation are expected to pick up gradually as the economy recovers.

With Chinese property giant Evergrande drowning in a mountain of debt, the RBA board also flags disruption in China's property development world as a cause for concern.

Members note that several risks to the outlook for growth and financial stability are receiving attention in China. “In particular, regulatory changes aimed at reducing leverage among real estate developers, as well as restrictions on demand for real estate, had led to slower construction activity and liquidity difficulties for some large property developers,” the minutes state.

“This had led to a heightened risk of fire sales of assets and raised concerns about the potential for financial stability issues.”