SYDNEY, Aug 4 (Reuters) - The Australian and New Zealand dollars edged higher on Tuesday and bonds got a boost after the Reserve Bank of Australia (RBA) said it would again step into the market to buy government debt to keep yields down near its target.

The Aussie dollar inched up to $0.7134, though remains short of a 17-month peak of $0.7227 touched last week. Immediate support comes in around $0.7077 and $0.7040.

The kiwi dollar firmed to $0.6617, again short of a recent seven-month top of $0.6716. Support lies at $0.6575 and $0.6504.

The RBA surprised nobody by keeping rates steady at 0.25% at its August policy meeting, but did please debt traders by announcing it would buy bonds on Wednesday in the first purchase in months.

Back in March, the bank committed to buying as many bonds as needed to keep three-year yields near 0.25%. Since then it has rarely had to act, but yields have drifted a little higher in the last few weeks.

"Given this, tomorrow the Bank will purchase AGS in the secondary market to ensure that the yield on 3-year bonds remains consistent with the target," RBA Governor Philip Lowe said. "Further purchases will be undertaken as necessary."

In response, three-year bond futures firmed 2 ticks to 99.720, while the 10-year contract rose 3 ticks to 99.1550.

The RBA also reiterated that the COVID-19 economic downturn had not been as severe as first feared, but cautioned the new lockdown in Victoria state would have a major impact on growth.

Domestic data out on Tuesday showed retail sales had bounced again in June, but volumes were still down a steep 3.4% for the second quarter as a whole in the second largest drop on record.

The outlook has been further darkened by the tightening lockdown which will hammer the service sector even as it fuels online spending.

"We estimate the total potential hit to GDP will be at least A$10 billion ($7.13 billion), or more than 2% of national quarterly GDP; and probably closer to $16 billion, or 3.5% of GDP," said UBS economist George Tharenou.

"There is downside risk to the outlook."

That in turn will eat into tax revenue and likely prompt yet more stimulus spending, so lifting the already massive A$240 billion of bonds the government plans to sell in 2020/21. ($1 = 1.4027 Australian dollars) (Editing by Lincoln Feast.)