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RBA releases September interest rate call amid sinking economy

·4-min read
Image of RBA building plus smaller image of RBA Governor Philip Lowe
The Reserve Bank has announced its September interest rate decision. (Source: Getty)

The Reserve Bank of Australia has left the national cash rate unchanged at 0.1 per cent as the economy faces a worsening outlook on all fronts and a potential recession.

The RBA maintained the record-low rate, with GDP growth set to slide backwards in the September quarter and inflation and wages growth far below target.

RBA Governor Philip Lowe noted the current lockdowns' impact on what was “considerable momentum” in the economy.

“The recovery in the Australian economy has ... been interrupted by the Delta outbreak and the associated restrictions on activity,” Lowe said.

“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.”

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Lowe said he also expected unemployment to tick up in the next few months.

However, he was also optimistic about the downturn, and described the "setback" as "only temporary".

"The Delta outbreak is expected to delay, but not derail, the recovery.

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

Very much will ride on the COVID-19 situation and whether daily case numbers improve and restrictions can be lifted, he added.

"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."

In order to aid economic recovery, the RBA will also buy government bonds at the rate of $4 billion a week and will continue to do so until mid-February 2022.

RBA hold widely expected

The decision to hold steady comes as no surprise to Australian economists, who unanimously agreed that the RBA would hike rates only if wages and inflation growth hit their targets.

The RBA has repeatedly indicated that it needs to see inflation at 2-3 per cent and wages growth at 3 per cent or more before it moves to raise rates, which Lowe reiterated again in today's statement.

"It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range," said Lowe.

CANBERRA, AUSTRALIA - FEBRUARY 03: Reserve Bank of Australia Governor Philip Lowe delivers his address at the National Press Club on February 03, 2021 in Canberra, Australia. In the first meeting of the year held earlier this week, the Reserve Bank of Australia board decided to hold the cash rate target at 0.1 percent but Mr Lowe repeated the rate would not move up until actual inflation rises between 2 and 3 percent which is not expected to happen until 2024 at the earliest. (Photo by Sam Mooy/Getty Images)
Reserve Bank of Australia Governor Philip Lowe. (Photo by Sam Mooy/Getty Images)

"The central scenario for the economy is that this condition will not be met before 2024."

“I take the RBA at its word when it says it won't begin tightening monetary policy until the labour market is sufficiently tight,” said independent economist Saul Eslake.

Peter Boehm, of foreign exchange broker CSLA Premium, believes “we have a recipe for economic uncertainty” in the short term. “The RBA has no option but to keep rates on hold for now,” he said.

The sentiments of economic uncertainty were echoed by stock market analyst Dale Gillham, who said businesses and consumers were acting “conservatively” as a result of the lockdowns’ impact.

“I believe we will not see any strong growth for at least six months to one year,” Gillham said.

Economists are estimating the RBA won’t hike rates until early to mid-2023.

Once ‘roaring’ recovery interrupted by elongated lockdowns

Australia’s economy was rebounding strongly and even exceeding pre-pandemic levels in the first half of 2021.

However, the highly contagious Delta outbreaks have seen states dip in and out of lockdown and kept NSW and Victoria under stay-at-home orders.

As a result, businesses in Australia’s two economic powerhouse states have been shut for months on end, while thousands of workers have been left dependent on disaster payments.

Lockdowns have been estimated to cost the Australian economy $3.2 billion a week, or around $19.1 million an hour, according to Federal Treasurer Josh Frydenberg.

Though Australia narrowly side-stepped negative GDP growth in the June quarter, there is next to no doubt the economy has slid backwards in the September quarter.

Australia will officially be in a recession if December figures also reveal negative GDP growth, although Lowe said he expects economic growth for the December quarter.

Unemployment figures released later this month will give a fuller picture of jobs lost from the lockdown.

Meanwhile, wages grew just 0.4 per cent in the June quarter, and core inflation figures are expected to be subdued.

Governments on state and Federal levels are promising freedoms once vaccination targets of 70 and 80 per cent have been met, with NSW to begin trialling vaccine passports at some venues.

But economists have warned that the economic bounceback from these lengthy lockdowns won’t be as speedy and as strong as before.

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