Reserve Bank remains confident despite Delta

Reserve Bank Board meeting minutes; Overseas arrivals & departures

What happened? The Reserve Bank of Australia (RBA) Board released the minutes of its August 3 meeting. The Board re-affirmed its decision to pare back bond purchases, noting that fiscal policy was more appropriate than monetary policy to provide temporary short-term support to the economy.

Implications: Covid-19 is the central issue when it comes to determining the outlook for the economy – the vaccination take-up rate and the increase in Delta cases. The RBA noted, “health outcomes would continue to present the main source of uncertainty for the economic outlook.”

Other economic events: There were 102,840 overseas arrivals in June and 98,350 overseas departures.

The Reserve Bank Board minutes are important in gauging policy settings. Arrivals & departures data is important for airlines, hotels, shops and transport operators.

What does it mean?

• The Reserve Bank is putting its faith in vaccinations and efforts by health officials to suppress the Delta variant. If the Reserve Bank is correct in its assumption that the economy re-opens in the December quarter, activity is expected to rebound quite quickly. But from the vantage-point of the NSW lockdown, economists like ourselves cannot help thinking that re-opening of the economy could take a little longer.

• CBA group economists expect the economy to contract 2.7 per cent in the September quarter before lifting 1.9 per cent in the December quarter. The economy is expected to pick up momentum in 2022, especially in the second half of the year and into 2023. The economy is tipped to grow 1.8 per cent in 2021/22 and 4.4 per cent in 2022/23. The Reserve Bank tips firmer growth of 4.5 per cent in 2021/22 and then 4 per cent growth in 2022/23.

• Today, minutes of the August Reserve Bank Board meeting were released. This was the meeting that confirmed that bond purchases would be pared back. As the RBA acknowledged, many economists had expected a reversal or delay to that decision given the Delta outbreak in NSW. Instead, the RBA re-affirmed the decision, rationalising that if short-term support for the economy was required, fiscal policy was a more appropriate tool than monetary policy.

• At the August meeting the RBA Board also signed off on the latest economic forecasts – forecasts that paint a positive picture of the recovery path.

• Whether you are upbeat or more conservative, the view is quite clear about interest rates – they will remain at record lows for at least the better part of two years.

What do you need to know?

Minutes of the Reserve Bank Board meeting held on August 3

• Details of the Reserve Bank’s minutes can be found here:
Key quotes:

• Overall economy: “Turning to domestic economic developments, members noted that the recovery had established strong momentum prior to recent outbreaks of the Delta variant of COVID-19.”

• “Under the assumption that further lengthy lockdowns would be limited, the economy was forecast to rebound from the current setback later in the year as restrictions are eased, consistent with the previously observed pattern in Australia and overseas.”

• On spending: “Timely indicators suggested that household consumption would contract in the September quarter in response to the extended lockdown in Greater Sydney and the shorter lockdowns elsewhere. This was expected to account for much of the quarterly decline in GDP.”

• On the housing market: “Members noted that conditions in established housing markets remained strong, in contrast to the experience during the extended lockdowns in 2020. National housing prices had increased further in July following a 6 per cent increase in the June quarter.”

• On ther job market: “Some employment losses were expected, although a fall in labour force participation was anticipated to limit the increase in the unemployment rate. The high level of job vacancies and increased fiscal support would also help limit job losses. However, much would depend on health outcomes and the duration of the lockdowns.”

• Baseline scenario: “The baseline scenario assumed that the domestic vaccine rollout would accelerate in the months ahead, reducing the frequency and severity of lockdowns and allowing the international border to be reopened gradually from mid 2022. It also assumed that the Greater Sydney lockdown would extend through the September quarter, with some further brief and/or less severe restrictions assumed to occur in parts of Australia in the December quarter.”

• On bond buying: “The current virus outbreaks and lockdowns had interrupted the recovery and many households and businesses were facing difficult conditions. Members therefore considered the case for delaying the tapering of bond purchases to $4 billion a week currently scheduled for September 2021. They noted that the outlook for the economy is for a resumption of strong growth in 2022. Members judged that any additional bond purchases would have their maximum effect at that time, with only a marginal effect at present, which is when the extra support might be required.”

• Conclusion: “Recognising that fiscal policy is a more appropriate instrument than monetary policy for providing support in response to a temporary, localised reduction in incomes, members welcomed the substantial fiscal measures that had been announced. Given these considerations, the Board reaffirmed the previously announced change in the rate of bond purchases. That said, the bond purchase program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target. The Board would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery. In any event, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.”

Overseas arrivals & departures

Data and chart are sourced from the Australian Bureau of Statistics (ABS)

• In original terms, overseas visitor arrivals stood at 102,480 in June (averages of 3,416 per day), down from a 15-month high of 114,520 in May. Provisionally there were 75,330 arrivals in July. Of the 102,480 arrivals in June, 59,380 were Aussies with the remained overseas visitors.

• In original terms, overseas visitor departures stood at 98,350 in June, down from a 15-month high of 107,230 in May. Provisionally there were 88,170 departures in July. Of the total departures on 98,350 in June, 64,400 were Aussies and the remainder overseas visitors.

Visitors arriving in Australia in 2020/21:

• There were 150,880 visitor arrivals, down 97.8 per cent on the previous year

• New Zealand was the largest source country, accounting for 83,710 visitors nationally

• The main reason for travel was ‘Visiting friends/relatives’ (54.1 per cent). A year ago it was ‘Holiday’ (46.3 per cent)

• Nationally, the median duration of stay in Australia was 27 days.

Australian residents returning to Australia in 2020/21:

• There were 223,830 resident returns from overseas, down 97.4 per cent on the previous year

• New Zealand continued to be the leading destination country for Australians travelling overseas, accounting for 122,740 trips nationally

• The main reason for travel was ‘visiting friends/relatives’ (52.7 per cent). A year ago it was ‘Holiday’ (57.3 per cent)

• Nationally, the median duration away was 29 days.

Published by Craig James, Chief Economist, CommSec