The Reserve Bank of Australia (RBA) Board met yesterday (7 April 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 last month.

The RBA commented on several monetary decisions made last month 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 range target.

 

Quantitative easing

Last month, the RBA decided to for the first time 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 as of yesterday has officially purchased around A$36 billion of government bonds in the secondary market, including bonds issued by the states and territories. 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. However, it is likely the RBA will make smaller and less frequent purchases of government bonds if conditions improve.

 

Banking sector

The RBA notes that the RBA has injected substantial liquidity into the financial system through its daily open market operations and the term funding facility to support the flow of credit through the economy.  The term funding facility is a three-year facility to banks at a fixed rate of 0.25 per cent. This facility is for at least $90 billion. The RBA notes that the first drawings under the term funding facility were made on Monday 6 April 2020.

 

What is the outlook for the Australia economy?

The outlook for the Australian economy in the March and June quarter is very poor. The RBA provided no forecasts for what they expect the economic contraction to be. Further, it is anyone’s guess what this contraction could be in the March and June quarters. The package of measures announced by the RBA is as comprehensive as it gets and is directed at providing liquidity to the Australian financial system and to stimulate the Australian economy. At this point, it is important to note that the monetary tools available to the RBA to stimulate economic activity have ran out. This is shown by this announcement, as there are no new monetary tools available to stimulate economic activity, simply maintaining the previous tools announced at the last meeting.

While these measures are a positive, it is unlikely to stimulate economic activity enough in the short-term to prevent a major downturn. It us now up to the fiscal policy tools to provide stimulate economic activity. The Federal Government has announced a total of three stimulus packages totalling A$213.6 billion. It is unclear that these measures will do much in the short-term, as the virus has materially dampened economic activity. However, this may allow for a strong bounce back for the Australian economy once the Government allows a re-opening of day-to-day life. Finally, it is unclear yet to know the full impact these fiscal measures will have on the government budget, but it is reasonable to suggest that Australia will not see a fiscal surplus for some time.

 


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April 8, 2020