Australia Central Bank Set to Hold as Virus Crisis Spirals

(Bloomberg) -- Australia's central bank staff will be working around the clock to factor in the latest data from Victoria state's spiraling Covid crisis into economic projections ahead of Tuesday's policy meeting and Friday's forecasts publication.

Reserve Bank Governor Philip Lowe is set to keep interest rates and the three-year yield target unchanged at 0.25%, most economists say, and reiterate a readiness to resume buying government bonds in the event conditions worsen. Yet, bank economists will be grappling with the fluid situation in Melbourne -- home to about 20% of Australians -- as they prepare the quarterly update.

Victoria declared a state of disaster after its renewed outbreak showed no signs of abating, with Melbourne residents now under a nighttime curfew. “This will have clear negative implications for the economy,” said Commonwealth Bank of Australia's Gareth Aird. “The better news on the spread of Covid‑19 in Australia, excluding Victoria, will largely be offset by the situation in Metropolitan Melbourne.”

Premier Daniel Andrews announced the new measures as the state reported another 671 new cases and seven deaths. More than 380 people were hospitalized, with 38 in intensive care. Victoria, which accounts for about a quarter of national GDP, is now isolated from the rest of the country as other states shutter their borders against the spike in community transmission.

The RBA's quarterly Statement on Monetary Policy is due Friday at 11:30 a.m., with Assistant Governor Luci Ellis, the bank's chief economist, delivering a speech shortly after that's likely to address the vagaries of forecasting in such an uncertain period.

Treasury, in a fiscal and economic update two weeks ago, estimated Victoria's restrictions would cut economic growth by around 0.75 percentage point in the third quarter.

While no change to the RBA's policy setting is widely expected, David Bassanese, chief economist at BetaShares Pty. on Monday highlighted the risk of a surprise rate cut to 0.1% at tomorrow's meeting.

“Although the RBA's policy kitbag appears largely empty, it has promised it can do more if need be,” he said in a research note. “Melbourne's lurch from bad to worse last week could be the catalyst! Even if the RBA does not cut this week, I now see such a move as increasingly likely by November.”

After an initial flurry of activity -- injecting liquidity, cutting rates, setting the yield target and buying bonds -- the RBA has sat tight for the past three months. In its July meeting, the board discussed alternative policies it could have pursued, including taking the cash rate and yield target to 0.10%. The bank concluded it had followed the right path and no further action were required in the current circumstances.

Still, with a deflationary pulse emerging, lifting real interest rates, and the currency on a tear, monetary conditions are tightening.

Friday's release “will be one of the most eagerly anticipated RBA publications of this year,” said Josh Williamson, a senior economist at Citigroup Inc., who notes the early reopening of the economy, extension of the stimulus and large drawdowns from pension funds should see forecast upgrades.

“The risk is that the return to a hard lockdown in Greater Melbourne and decision by the Queensland premier to close the border to residents of Greater Sydney tips the RBA into not upgrading,” he said.

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