Philip Lowe says the Delta outbreak will delay but not derail the recovery.

The Reserve Bank of Australia will go ahead with its plan to reduce its weekly bond-buying program to $4 billion - down from $5 billion - but will continue purchases at this rate until at least next February.    

Many economists expected the central bank would delay the taper of the quantitative easing program as economic conditions weakened and lockdowns in New South Wales and Victoria continue.  

However, RBA governor Philip Lowe said on Tuesday that the Delta outbreak is expected to delay, but not derail, the recovery and stuck with his earlier decision. 

“The Board's decision to extend the bond purchases at $4 billion a week until at least February 2022 reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak,” he said.  

“The Board will continue to review the bond purchase program in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target."    

The governor added that the bond purchases, together with the low level of the cash rate, the yield target, and the funding provided under the Term Funding Facility, are providing "substantial and ongoing support" to the Australian economy.   

Lowe conceded that economic recovery has been interrupted by the latest Delta outbreak and the associated restrictions on activity.    

The central bank official expects GDP to decline materially in the September quarter and the unemployment rate will move higher over the coming months.   

“While the outbreak is affecting most parts of the economy, the impact is uneven, with some areas facing very difficult conditions while others are continuing to grow strongly," he added.   

“This setback to the economic expansion is expected to be only temporary."   

Bounce back   

As vaccination rates increase further and restrictions are eased, Lowe continued, the economy should bounce back.    

"There is, however, uncertainty about the timing and pace of this bounce-back and it is likely to be slower than that earlier in the year,” he stated.   

"Much will depend on the health situation and the easing of restrictions on activity. 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 AMP Capital’s Shane Oliver agrees that the setback in the recovery will be temporary, he thought that the hit flowing from the expansion of the lockdowns since the last RBA meeting would constitute the sort of "significant setback for the economic recovery” that the central bank would act on.  

"In any event, the RBA clearly has a higher hurdle to change course on the taper and has simply chosen to turn it into a longer slower taper, at least for now,” he said.   

At the Tuesday meeting, the RBA held the cash rate target at 10 basis points and reaffirmed that it will not increase the cash rate until inflation is sustainably within the 2 to 3 percent target range which will not likely occur before 2024. 

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