RBA to rethink QE cut on delta lockdown

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The RBA would be wise to wait and gather more information on the prospects.

The thinking of the RBA will be strongly influenced by the duration of the lockdowns and any permanent damage to the economy.

The RBA has learned from past bottlenecks that the economy typically rebounds quickly once businesses reopen.

The V-shaped recovery was the experience in the case of Melbourne’s nearly four-month lockdown in the middle of last year, when the $ 100 billion JobKeeper wage subsidy existed.

Since then, capitals have rebounded from short lockdowns following the end of JobKeeper.

Bosses tend to cut the hours before they fire staff.

But the uncertainty fueled by the highly infectious delta variant and the prospect of a prolonged Sydney lockdown add much more uncertainty, especially with 250,000 construction workers off work for at least two weeks.

Lockdowns will cost the economy about $ 2 billion per week and the longer they go on, the greater the risk to jobs, confidence and business investment.

So for the RBA, the length of the lockdown without JobKeeper, despite other federal government cash support for businesses and households, will be critical.

The brutal reality facing the Prime Minister and heads of state is that no one really knows how long these blockages will last, or whether it is definitely possible to revert to zero active cases in the community, given that the delta variant is two to three times more contagious.

The pandemic raises new unforeseen obstacles. Government decision-makers are driving blindly.

“We are in a new world,” says a government source.

Certainly, the fact that the RBA by September makes weekly bond purchases of $ 4 billion or slightly more will have almost no immediate effect on the closure of Sydney and Melbourne businesses and the dismissal of workers.

Government tax policy is the main game from here.

Prime Minister Scott Morrison and Treasruer Josh Frydenberg have shown their willingness to do more, if necessary.

More than $ 100 billion in excess pandemic savings by households and businesses will help cushion the blow.

The 4.9% unemployment rate in June is a good place to start and justified the announcement of the RBA’s speed decrease – in the absence of what we now know of the deepening lockdown.

For the RBA, a backflip on the QE cut just a month after its July cut announcement could potentially hurt its credibility.

On the other hand, being flexible could increase market confidence that the RBA will react to changing circumstances.

One of the main justifications for quantitative easing was to limit the Australian dollar, which fell below 74 ¢ US. A weaker currency reduces the case for higher QE.

In addition, the central banks of Canada and New Zealand are ending their extraordinary stimulus measures and preparing for interest rate hikes.

But Canada and New Zealand are much closer to their inflation and full employment targets.

Another policy option would be for the RBA to reinstate its $ 200 billion term financing facility for commercial banks, to take out cheap government-guaranteed loans for small businesses to keep them afloat during shutdowns.

But bankers have told the government they have cash on hand and are happy to lend and give refunds and other concessions to small businesses.

It is therefore not necessary to reintroduce TFF.

The RBA faces a tough decision over its QE plans and is expected to see how events unfold over the next two weeks.

The duration of the confinement will be decisive.

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