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Economy

Australia central bank to trim bond buying despite delta COVID risk

Hawkish decision surprises markets but RBA sees virus pressure as temporary

The RBA affirmed its decision to trim purchases of government bonds to AU$4 billion a week from September, from the current weekly pace of AU$5 billion.   © Reuters

SYDNEY (Reuters) -- Australia's central bank surprised markets on Tuesday by standing its ground on a decision to taper its bond buying program from September, expecting the hit to the economy from the delta variant of the coronavirus to be temporary.

The Reserve Bank of Australia (RBA) kept its cash rate at 0.1% for its eighth straight meeting, in a widely expected move. It reiterated interest rates will not be raised until inflation was sustainably within its 2-3% target band, a goal unlikely to be met before 2024.

The RBA also affirmed its decision made in July to trim its purchases of government bonds to AU$4 billion a week from September from the current weekly pace of AU$5 billion, surprising markets betting on higher or steady purchases.

That move sent the Aussie dollar to a day's high of $0.7408.

In a short post-meeting statement RBA Governor Philip Lowe struck an upbeat note about Australia's economy, which recovered from a pandemic-induced recession of 2020 much faster than expected.

"The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter," Lowe said.

The highly transmissible delta variant of the coronavirus has taken hold in Sydney with close to 4,000 infections since mid-June despite weeks of lockdown.

Queensland state is also battling a smaller outbreak with Brisbane, Gold Coast and Sunshine Coast under stringent stay-home orders. Australia's second-most populous city of Melbourne came out of a two-week lockdown last month after controlling its delta outbreak.

"The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly," Lowe said.

He noted the economy was benefiting from "significant" policy support, adding the ongoing COVID-19 immunization plan will also assist with the recovery. Australia lags its rich world peers with under 20% of its adult population fully vaccinated.

Lowe said the economic outlook for the coming months was "uncertain", though the RBA expects a solid 2.5% GDP growth in 2023, on top of a "little over 4%" in 2022.

"The Bank's updated forecasts are decidedly hawkish," said Capital Economics economist Marcel Thieliant.

"The RBA's decision to not delay the tapering of its asset purchases is a hawkish signal and consistent with our view that the Bank will hike rates in early-2023."

Economists in a Reuters poll conducted over the past week pushed back expectations for the next RBA rate hike to the third quarter of 2023, from earlier predicting a 15 basis points increase in the second quarter.

On its part, the RBA expects the cash rate to remain at 0.1% until 2024 with inflation seen at 1.75% over 2022 and 2.25% over 2023.

Its forecasts for the labor market are rosier too with the unemployment rate seen trending lower to 4.25% at the end of 2022 and 4% at Dec-2023, from 4.9% in June.

The RBA will publish detailed forecasts on Friday.

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