Australia Sticks With Taper Plan Even as Virus Dents Economy

The Reserve Bank of Australia said it will stick with its planned tapering of bond purchases even as Sydney’s protracted lockdown is set to push the economy into contraction this quarter.

The Australian dollar advanced after Governor Philip Lowe and his board surprised economists by keeping to their plan to reduce the pace of weekly bond purchases to A$4 billion ($3 billion) in September from A$5 billion now, while maintaining the cash rate at 0.1% on Tuesday.

“The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly,” Lowe said in a statement. “The economy is benefiting from significant additional policy support and the vaccination program will also assist with the recovery.”

The surprise move reflects an underlying confidence among policy makers that with the currency down about 7% in the past five months and yields lower, the economy has plenty of support and is likely to bounce back fast once restrictions lift.

Lowe has nonetheless made clear that he doesn’t want to get ahead of the Federal Reserve when it comes to unwinding stimulus, with Chair Jerome Powell saying there’s still some way to go before a U.S. tapering.

“The board will maintain its flexible approach to the rate of bond purchases,” Lowe said. “The program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target.”

The Australian dollar climbed after the announcement, buying 74.03 U.S. cents at 2:46 p.m. in Sydney from around 73.70 cents prior to the release.