SYDNEY (Reuters) – Australia’s central bank held its cash rate at an all-time low on Tuesday, predicting the economic recovery will likely be both ‘uneven’ and ‘bumpy’ as the country’s second biggest state locks down to fight a resurgence of the coronavirus.
In an ominous sign that underscored policymakers’ cautious stance, data out earlier showed retail sales volumes suffered their biggest plunge in two decades in the second quarter and analysts warned spending will remain depressed for some time yet.
On Tuesday, the Reserve Bank of Australia (RBA) said its emergency stimulus was ‘working as expected’ while leaving its cash rate at 0.25% in a widely expected decision.
The RBA, however, painted a gloomy picture for the coming months, predicting the jobless rate would spike to 10% later this year due to further job losses in Victoria which is struggling to contain a second wave of infections.
Unemployment is seen staying elevated around current levels of 7% over the next couple of years. Given the spare capacity, the RBA expects inflation to continue to undershoot its 2% to 3% medium-term target over the next two years.
The central bank will release its detailed quarterly outlook on Friday.
“The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s,” RBA Governor Philip Lowe said in a post-meeting statement.
“As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia,” Lowe added.
“This recovery is, however, likely to be both uneven and bumpy with the coronavirus outbreak in Victoria having a major effect on the Victorian economy.”
Victoria declared a “state of disaster” this week following a relentless surge in coronavirus infections since late June.
The RBA forecast a 6% drop in gross domestic product over 2020, and then expects 5% growth over the following year.
Consumer spending is proving to be one of the biggest drags on the economy, with the larger-than-expected 3.4% drop in second quarter retail volumes seen subtracting a hefty 0.6 percentage points from growth in that period.
In contrast to retailers, Australia’s exporters have been going gangbusters thanks to demand from China for iron ore and other resources, while imports have been hammered by the lockdowns.
Separate data on Tuesday showed the trade surplus swelled to A$8.2 billion in June, taking the total for the second quarter to a whopping A$23.4 billion.
Still, economists warned the outlook was further clouded by the coronavirus woes in Victoria, with weekly spending data by the country’s major banks already showing signs of moderation.
“Victoria’s return to hard lock-down changes everything…(and) presents a significant risk of Victoria dragging down growth in national activity data in the last two months of Q3,” said Citi economist Josh Williamson.
“We could also see negative confidence impacts drag on data in other states, particularly as other states have used the rise in Victorian COVID-19 cases to defer opening their borders or sought to tighten access to some states.”
(Reporting by Swati Pandey and Wayne Cole; Editing by Shri Navaratnam)