RBA sees temporary Delta hit to economy

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Reserve Bank of Australia governor Philip Lowe says the coronavirus Delta variant outbreak has interrupted the economic recovery but not derailed it.

Following Tuesday's monthly board meeting, Dr Lowe said he expects COVID-19 restrictions, which include lengthy lockdowns in NSW and Victoria, will have a material impact on the economy in the September quarter.

Economists are predicting a contraction of as much as four per cent in the quarter.

The governor also expects the unemployment rate will move higher over coming months, having struck a 13-year low of 4.6 per cent in July.

"This setback to the economic expansion is expected to be only temporary," Dr Lowe said in a statement.

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

He expects the economy to be growing again in the December quarter.

As widely expected, the RBA board left the cash rate at a record low 0.1 per cent at the meeting.

Dr Lowe reiterated the RBA would not increase the cash rate until actual inflation was sustainably within the two to three per cent target range.

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

"Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently."

BIS Oxford Economics senior economist Sean Langcake said a rising unemployment rate due to lockdowns will stall progress towards that aim of a tighter labour market and higher wage growth.

"As such, the RBA's central scenario of keeping rates on hold until early 2024 now looks more feasible to us," he said.

Despite the economic setback, the RBA is sticking to its earlier announced plan of reduced purchases under its bond-buying program, which aims to keep market interest rates and borrowing costs low.

The central bank will now buy $4 billion worth of bonds per week rather than $5 billion, but will maintain that level until at least February 2022.

It had earlier said it would review the program in November.

Some economists had expected the RBA to delay this winding back, or so-called tapering, to $4 billion a week in light of a deteriorating outlook.

Meanwhile, in a further sign that lockdowns in the nation's two major cities are hurting the economy, Australia's services sector has taken a hit.

The Australian Industry Group performance of services index slumped 6.1 per cent to 45.6 in August and its lowest level since September 2020.

An index reading below 50 points indicates the sector is in contraction.

The decline was driven by a sharp fall in sales, fewer deliveries and a drop in new orders.

"With lockdowns in Victoria, the ACT and NSW set to continue this month and with new orders down on previous levels, the immediate outlook is for another weak month or two," Ai Group chief executive Innes Willox said.

Confidence among Australians has also been undermined by continually high COVID-19 infections in the past week, even as vaccination rates speed up.

The weekly ANZ-Roy Morgan consumer index - a pointer to future household spending - fell 1.8 per cent.

Confidence dropped 5.3 per cent in Sydney and 0.8 per cent in Melbourne.

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