The Reserve Bank of Australia (RBA) Board met today (4 August 2020) and decided to reaffirm the targets for the cash rate and the yield on 3-year Australia government bonds of 25 basis points, including the other elements of the monetary package announced in March.
The RBA commented on several monetary decisions made in March and provided updates on these decisions.
Cash rate decision
The cash rate has been maintained in the lower bound of 0.25%. The RBA expects the cash rate to remain in this lower bound until the Australian economy reaches full employment (around 4% unemployment), or if the inflation rate surpasses the 2 – 3% inflation target range.
In March, the RBA decided for the first time to undertake an asset purchasing plan (Quantitative Easing) to purchase Australia government bonds to target the 3-year bond rate at 0.25% (in line with the current cash rate). The RBA has purchased around A$50 billion of government bonds in the secondary market, including bonds issued by the states and territories (according to last board meeting). The RBA noted that tomorrow the Bank will purchase further government bonds in the secondary market, as yields have been a little higher than 25 basis points over recent weeks. In addition, the RBA noted that the RBA is willing to continue this asset purchasing plan to keep the 3-year government bond rate at around 0.25% until Australia moves towards full employment and its inflation goal.
The RBA is continuing to support credit and maintain low funding costs in the economy through the RBA’s daily open market operations. Authorised deposit-taking institutions (ie, banks) are making use of the Term Funding Facility, with total drawings to date of around $29 billion. It is likely deposit-taking institutions will continue to use this facility until economic conditions normalise.
What is the outlook for the Australia economy?
The outlook for the Australian economy is poor. As shown in the national accounts for the March quarter 2020, GDP fell 0.3% over the quarter. It is expected in the June quarter 2020 the economy will contract by a much greater amount than 0.3%.
The RBA noted that Australia is experiencing the biggest economic contraction since the 1930s. However, on the positive side, the RBA noted that the downturn is not as severe as earlier expected and an economic recovery is now underway in most parts of Australia. This economic recovery is likely to be inconsistent, as COVID-19 outbreaks may continue to occur until there is a vaccine. This is particularly apparent in Victoria, as several locations in Victoria are now going back into lockdown.
Since March, the Australian Bureau of Statistics reported that 800,000 Australians have lost their jobs. This does not include the millions of Australians retaining their job because of Government assistance (job keeper). The unemployment rate could potentially move up to 10% towards the end of 2020 but is expected to decline gradually to around 7% in the coming years.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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