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A world of difference - Reserve confronts an economy in free-fall

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The Reserve Bank of Australia will hold its monthly board meeting faced with a vastly different set of circumstances than when they last gathered early in July.

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Last month, RBA governor Philip Lowe was talking about a “positive path” for the economy after recovering from recession stronger than expected.

But four weeks on, the outlook has darkened with economists now predicting a sharp economic contraction in the September quarter.

This is largely the result of the lengthy virus lockdown in Greater Sydney and regional NSW areas.

Last month’s lockdowns in Victoria and South Australia will have also left a negative mark, as will the current snap restrictions in Queensland.

When the RBA board last met, and given the then rosy outlook, it agreed to wind back on its bond buying program, which aims to keep market interest rates and borrowing costs low.

Instead of buying $5 billion of government bonds a week under its current program, from September this would reduce to $4 billion.

Given the RBA is reluctant to reduce the cash rate any further to stimulate the economy, being already at a record low 0.1 per cent, economists expect this so-called tapering of bond purchases to be put on hold.

“The dramatic change in the outlook for the economy for the current half since the last meeting is likely to see the RBA delay the step down in its bond buying from September until early next year when the outlook improves again,” AMP Capital chief economist Shane Oliver said.

Meanwhile, the extended lockdown in Sydney, a large number of virus cases each day and a rising death toll is likely to weigh on consumer confidence, a worry for retailers who have managed to stay open.

The weekly ANZ-Roy Morgan consumer confidence index is released on Tuesday, an indicator that dropped sharply in the past two weeks.

Home lending figures for June are expected to show another solid rise of about 1.5 per cent for the month, prior to the string lockdowns in recent weeks.

The Australian Bureau of Statistics will also issue building approval data for June, expected to suffer a further 4.5 per cent fall, winding back further from the strong gains generated by the federal government’s HomeBuilder program.

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