Central bank policy hinges on COVID-19 and lockdown
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.
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?
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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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.