Central bank policy hinges on COVID-19 and lockdown

Kate Samranvedhya

Jamieson Coote Bonds

A singular COVID-19 case emerged in New Zealand the day before the RBNZ monetary policy meeting in August. Without any hesitation Auckland went straight into a 7-day lockdown; 3-days for the rest of the country. The next day the RBNZ decided to remain on hold with its short-term interest rate settings, choosing the path of least regret.

Without COVID-19 risk, lockdown would not have eventuated and the RBNZ would have hiked the Overnight Cash Rate (OCR). The RBNZ August monetary policy statement, which was prepared before the re-emergence of COVID-19, showed an even more hawkish OCR projection.

The hiking path is projected to reach 2% OCR by the middle of 2023, instead of by 2024 that the RBNZ projected in May. Such fickleness is how much health risk and economic damage from lockdown can cloud the outlook and any central bank’s forecast. Tell me when the lockdown will end, and I will tell you when the economy will rebound.
The 2021 problem, though, is the Delta variant, which can be 2-4 times more transmissible than most strains of the virus that were rampant in 2020. The Delta strain is so virulent that it cannot be eliminated; it is now becoming endemic and creating continued uncertainty in society. The UK is the most obvious example of living with COVID-19 and has become a global template for dealing with the virus. On July 19 − its ‘freedom day’, lockdown was lifted, at the time the UK vaccination rate was 69.5% first dose/54.5% full dose of total population and 87.6% first dose/68.5% full dose of adult population.

Currently the Australia vaccination rate is at 39% first dose of the total population – still low by comparative standards. The UK took roughly four months to vaccinate its population from 39% to their target which culminated in their objective of ‘freedom day.’ Singapore is another country with a healthy vaccination rate at 79% first dose/73% full dose of total population. It took Singapore 1.5-2 months from 39% to get to the UK vaccination rate level that opened up the country. Hence, if vaccination is the only way to live with COVID-19, the pathway for normalcy in Australia would take approximately 2-4 months to achieve its ‘freedom day.’ Given the international roadmap, we need to make peace with domestic lockdown strategies until mid-October or as late as mid-December.

What does this mean for the RBA?

A full re-opening of the economy in November or December is probably one quarter later than the RBA had envisioned, but how to get there is clear. Like Singapore, Australia might be able to provide more mobility to vaccinated people by October, so the economic damage in the fourth quarter, or GDP, still has a fighting chance of not printing negative.

If we assume that life can return to normal in 2022 and the RBA can taper throughout 2022, that still does not alter its 2024 rate hike forecast. What is keeping the RBA rate hike forecast more circumspect than the RBNZ is that inflation in Australia hasn’t been inside the target band for many years. Unfortunately, we have yet to witness that a lower unemployment rate can instigate any wage pressure and deliver the results the RBA wants to achieve. 

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This information is provided by JamiesonCooteBonds Pty Ltd ACN 165 890 282 AFSL 459018 (‘JCB’) and JamiesonCoote Asset Management Pty Ltd ACN 169 778 189 AR No 1282427. Past performance is not a reliable indicator of future performance. The information is provided only to wholesale or sophisticated investors as defined by the Corporations Act 2001 (Cth). Neither JCB nor JCAM is licensed in Australia to provide financial product advice or other financial services to retail investors. This information should not be considered advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling units and does not take into account your particular investment objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters, any relevant offer document and in particular, you should seek independent financial advice.

Kate Samranvedhya
Deputy Chief Investment Officer
Jamieson Coote Bonds

Kate oversees a range of investment strategies for JCB clients and is based in Singapore. She is a career fixed income portfolio manager, and specialises in High Grade Bond portfolio management across all major global regions.

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