Lockdowns Lead to Lock Down of RBA Cash Rate

 

The national economy has been bouncing back nicely from the woes of last year’s COVID-19 outbreak. Many economists have been optimistic the Reserve Bank of Australia would hike up interest rates sooner rather than later. After all, the prospering economy could do with a little inflation to move us along.

Let’s just say the recent COVID-19 Delta has had something to say about that. Delta has seen the nation’s surprising economic recovery and consumer confidence ultimately deflated.

With domestic border lockdowns springing up faster than Grandpa Jim’s springtime seedlings, the RBA announced, at the time of writing, the cash rate would remain at a record low of 0.10 per cent.

Griffith University Professor of Economics, Tony Makin, is of the opinion the number of lockdowns across the country, together with lagging vaccination rates, will “curb economic activity significantly…the economy may need extra stimulus, and that will slow the pressures for an interest rate rise”.

For the ninth month in a row the RBA has kept the cash rate unchanged. “We might even see a negative GDP quarter for September 2021 if lockdowns persist,” says Mr Makin.

While the start of 2021 saw Australia looking at rising employment rates, wages growth and consumer confidence – the key factors that play into an interest rate increase – the recent ripple effect of multiple state lockdowns has dampened this optimism.

There have been positive signs from both the USA and UK that herd immunity from COVID-19 would also spell life returning to ‘normal’ for Aussies soon enough. Then Delta entered the scene and we now get to see we’d been a little premature with thinking we were the bachelor going to get that rose.

On the other side of the coin, Federal government debt is increasing and will likely be over $1 trillion dollars by 2022.

Extended lockdowns aren’t helping the situation either, as NSW is the largest state economy. AMP Capital’s chief economist Shane Oliver notes the NSW lockdown is “costing the NSW economy, and therefore by definition the national economy, about $1 billion dollars a week”.

This equates to the July through September 2021 12-week lockdown equalling a $12 billion disaster for the national economy. Mr Oliver also highlights extended lockdowns lead to the country as a whole taking longer to recover once lockdown restrictions are lifted.

It’s not necessarily all doom and gloom however, as the Delta situation can change swiftly (read: I am being optimistic here!) Inflation in the USA appears to be on the rise and Australia, as a nation, tends to follow the trend of the land of the star spangled banner.

While interest rates will remain low for the time being, it is anyone’s guess exactly when their rise will be seen on the horizon. For now, take advantage of cheap finance and build your asset portfolio – buy property.