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RBA faced with vastly different situation

Colin BrinsdenAAP
The RBA on Tuesday will consider a much changed economic outlook since its last meeting.
Camera IconThe RBA on Tuesday will consider a much changed economic outlook since its last meeting. Credit: AAP

Philip Lowe and his Reserve Bank board members will sit down to a markedly different set of circumstances when they meet on Tuesday compared to just a month earlier.

Back in early July, Governor Lowe was lauding the economy for bouncing back earlier and stronger than expected.

“The Australian economy is on a positive path,” Dr Lowe said.

But four weeks on, the outlook has been turned on its head with economists now predicting a sharp economic contraction in the September quarter.

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This is largely the result of the lengthy virus lockdown in Greater Sydney and regional NSW areas. Last month’s snap lockdowns in Victoria and South Australia will have also left a negative mark, as will the current snap restrictions in Queensland.

At this stage, Treasurer Josh Frydenberg is not expecting the downturn to extend into the December quarter, which would constitute a recession, although he says much will depend on the success of the NSW lockdown.

When the RBA board last met, and given the then rosy outlook, it agreed to wind back on its bond buying program, which aims to keep market interest rates and borrowing costs low.

Instead of buying $5 billion of government bonds a week under its current program, from September this would reduce to $4 billion.

Given the RBA is reluctant to reduce the cash rate any further to stimulate the economy, being already at a record low 0.1 per cent, economists expect this so-called tapering of bond purchases is likely to be put on hold, or even increased, faced with a fast deteriorating economy.

“Given the sharp unexpected deterioration in the economy the RBA Board should send a clear signal that it continues to be committed to supporting the Australian economy with an immediate increase in its weekly bond purchases,” Westpac chief economist Bill Evans said.

Dr Lowe will issue a statement after the meeting as usual, but he will get the opportunity to further explain the RBA’s actions when he faces the House of Representatives economics committee on Friday.

On the same day, the central bank will also release its quarterly statement on monetary policy, which will contain its latest forecasts for economic growth, unemployment and inflation.

Being the first week of a new month, there is also a wealth of new data with releases on house prices, consumer sentiment, building approvals, lending, international trade and payroll jobs.

Meanwhile, Australian shares look set for a firm start to the week, despite Wall Street suffering a stumble on its last trading day of the month.

The S&P 500 lost 23.89, or 0.5 per cent, to 4,395.26. The Dow Jones Industrial Average fell 149.06, or 0.4 per cent to 34,935.47, and the Nasdaq composite dropped 105.59, or 0.7 per cent to 14,672.68.

The decline was triggered by heavyweight Amazon dropping 7.6 per cent after reporting sales growth that wasn’t as strong as analysts had expected.

However, Australian share futures managed to rise 37 points, or 0.5 per cent, at 7337 and ahead of what is expected to be a buoyant local earnings season..

On Friday, the benchmark S&P/ASX200 index closed lower by 24.8 points, or 0.33 per cent, to 7392.6.

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