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Australia Recovery May See ‘Some Setback’ From Omicron, RBC Says

(Bloomberg) — The omicron virus strain could result in “some setback” to the Australian economy’s recovery from recent lockdowns and is likely to reinforce the central bank’s inclination to sit tight, according to Royal Bank of Canada. 

“Given the delta experience, we would expect policy makers to assume the worst, move quickly, and take an overly cautious approach,” Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC, said in a research note Monday. “A delay of further easing in restrictions and/or additional measures will be inevitable if omicron moves quickly in Australia.”

There may also be a delay in recently announced border reopenings, she said.

Global markets went into a tailspin late last week fearing the new strain of coronavirus, first identified in southern Africa, could herald a return to rolling lockdowns and border closures. Yields on Australian three-year government bonds slipped to as low as 0.85% Monday from a high of 1.28% in late October. Traders also pared bets on the pace of Reserve Bank interest-rate increases.

Australia’s east coast only reopened last month from protracted lockdowns to contain the delta variant of coronavirus. Recent domestic data point to “upside” to the recovery with buoyant consumers, increasingly optimistic businesses and a V-shaped bounce in the labor market likely to boost the central bank’s confidence that it’s on the right track, Ong said.

The RBA’s final meeting of the year on Dec. 7 is expected to see no change to monetary settings and it then breaks until February, when the board is due to review its A$4 billion ($2.9 billion) a week bond-buying program.

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Some economists see the bank potentially scrapping the program then given the economy’s rapid bounce-back. Traders have been pricing in a first 15-basis point rate rise in May, taking the RBA’s cash rate to 0.25%, and then at least two more hikes over the rest of the year. 

“A key risk to our positive outlook for 2022 is new C-19 strains, transmissibility, and vaccine efficacy,” Ong said. “The RBA will be of a similar view.”

With no expectation of change from the RBA next week, three other central bank meetings on the horizon will be more interesting “in the event omicron developments deteriorate,” Ong said.

“If so, will the Bank of England opt to stay steady again, the Federal Reserve stick to its current taper plans, and the European Central Bank repeat its dovish stance?”

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