The deterioration of the COVID situation in Sydney (and spillovers to other regions and states) has materially impacted the near term outlook for the economy. GDP will almost-certainly contract in the September quarter, and given the transmissibility of the delta variant (and the resultant risk of further outbreaks from quarantine) it is likely that significant restrictions will have to remain in place in a number of states until the vaccine rollout is significantly more progressed.

Given the heightened uncertainty, it is appropriate for the RBA to moderate the pace of any monetary tightening it was previously considering. While this implies no change to the cash rate in the near term, the Board should look to delay any further winding back of the QE program.

Over the medium/long term, the encouraging data from the UK, the US and other countries with respect to vaccine efficacy (that is, the breaking of the link between cases of COVID and hospitalisations and adverse outcomes) suggests that once the vaccine rollout has progressed it will be possible to sustainably relax restrictions and reach a ‘new normal’. Assuming fiscal policy settings remain accommodative (including the roll out of disaster payments and grants for businesses), the strength of the recovery in H1 2021 suggests that the economy has the capacity to bounce back strongly, as such my assessment on the outlook for 2023 and beyond is broadly unchanged, although the timing of the recovery is more uncertain given it is now much more contingent on the success of the vaccination program.