The Australian central bank cuts interest rates and enhances its bond buying program to support job creation and the economy’s recovery.
Australian policymakers emphasize their readiness to implement more monetary stimulus, if necessary.
The Reserve Bank of Australia (RBA) followed market pricing and eased monetary policy following today’s monetary policy meeting. The RBA cut the benchmark cash rate by 15 basis points to 0.10%; the cut follows rate reductions of 50 bps earlier this year and 75 bps in 2019 (chart 1). The RBA also lowered the target for the 3-year Australian government bond yield and the Term Funding Facility rate by the same magnitude to 0.10%. The interest rate on Exchange Settlement balances was reduced from 0.10% to zero. Moreover, the RBA announced a new element to its stimulus program; the central bank will purchase AUD 100 billion of government bonds of maturities around 5–10 years over the next six months.
The RBA will continue its yield targeting, buying bonds “in whatever quantity” to achieve the 0.10% target for the 3-year government bonds. These purchases are complemented by the pledge to buy longer-dated bonds, making its bond purchase program more in line with quantitative easing efforts in various other advanced economies. The RBA assesses that the announced monetary stimulus measures will underpin the economy’s recovery by lowering financing costs for borrowers, weaken the Australian dollar, buttress asset prices and balance sheets, and support the supply of credit to the economy. Indeed, further assistance is needed, as policymakers expect that the Australian labour market—an important focus point for the RBA—will remain weak for an extended period of time. Accordingly, the RBA stated that the cash rate will not be raised for at least three years. Simultaneously, the policymakers indicated their readiness to alter the size of the bond purchase program as needed, depending on labour market and inflation prospects. The central bank also noted that it is prepared to do more, if necessary. However, Governor Philip Lowe noted at the press conference that a negative policy rate is “extraordinarily unlikely”.
An economic recovery is underway in Australia following a deep—albeit brief—recession in the first half of 2020. The RBA’s policymakers are of the view that further monetary easing is more effective at this point of the rebound as policy transmission is not impaired by restrictions on activity. Moreover, the potentially adverse impact of further easing on financial stability is set to be counterbalanced by the strengthening economy that is expected translate to a lower number of non-performing loans.
Inflationary pressures will remain muted in Australia over the coming quarters due to significant spare capacity in the economy, high unemployment and low wage gains. We expect headline inflation to hover around 0.5% y/y at the end of 2020. Inflation will likely accelerate gradually over the course of 2021 as the economy normalizes, yet we do not anticipate it to reach the RBA’s target range of 2–3% y/y in a sustainable fashion until 2022 (chart 1). Weak demand-driven price pressures will allow the RBA to maintain accommodative monetary conditions in the foreseeable future.
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