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Reserve Bank meets amid lockdown economic clouds

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There has been a rapid deterioration in the economic outlook since the Reserve Bank of Australia board last met in August.

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Economists now expect the economy could contract by as much as four per cent in the September quarter as a result of lengthy coronavirus lockdowns in both NSW and Victoria, the nation’s two most populous states.

The RBA is widely expected to keep the cash rate cemented at a record low 0.1 per cent when it holds its monthly board meeting on Tuesday.

Even the Australian National University’s so-called RBA shadow board, made up of academics and economists, for once was in 100 per cent agreement that the cash rate should be kept unchanged.

“It is clear that the Delta strain is exceedingly difficult to contain and that a zero COVID strategy is untenable,” it said in a statement.

“Thus these states’ lockdowns will likely persist until they have reached vaccination rates of 70 or 80 per cent before restrictions are significantly relaxed.”

RBA governor Philip Lowe has repeatedly ruled out turning to negative interest rates to support the economy, saying they do more harm than good over time.

But economists are debating whether to expect changes to the central bank’s bond buying program, which aims to keep market interest rates and borrowing costs low.

Economists will also be looking for any signs of change in the RBA’s forward interest rate guidance given a more uncertain outlook.

The RBA wants to see inflation sustainably within its two to three per cent inflation target, which will need the unemployment rate to fall to four per cent and wages growth of at least three per cent.

It does not expect these conditions to be met before 2024.

-AAP

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