In line with its former statement to possibly stick with record-low level of interest rates for an extended period, the RBA has kept official cash rates steady at 0.25 per cent in its latest monetary policy meeting.
The Central Bank’s decision was widely expected by market experts, eyeing a lower level of interest rates until the economy makes considerable progress towards full employment. Moreover, the central bank had already eliminated the possibility of negative interest rates in its previous meeting, ruling out chances of a further rate cut.
At a time when the economy is facing a coronavirus-driven crisis with businesses in doldrums, this is a much-anticipated decision. In addition to retaining the existing interest rate level, the Central Bank has also maintained the 3-year bond yield at 0.25 per cent.
In this context, let us discuss key highlights of the RBA’s monetary policy meeting below:
Global Economy to Start Recovering Later this Year
The Central bank noted a severe downturn being experienced by the global economy amidst large-scale actions adopted to contain the coronavirus disease. The globe is facing surging levels of the unemployment rate, with significant job losses worldwide.
A report published last month indicated that the current unemployment levels in the US are quite similar to the levels observed during the Great Depression of 1930’s.
As per the RBA, the bright spot is that the infection rates have reduced in several countries due to the containment measures. The Central Bank sees the possibility of commencement of a revival in the global economy later this year if infection rates continue to decline; however, this will be supported by both the fiscal and monetary policy actions.
Monetary and Fiscal Policy Actions Playing a Pivotal Role
The Central Bank believes Australia is undergoing a difficult time period, with substantial uncertainty over the outlook of the economy. It expects the output to decline by about 10 per cent over 1H 2020 and by about 6 per cent over 2020 as a whole in the baseline scenario. However, the bank anticipates a bounce back of 6 per cent in the subsequent year.
Moreover, the bank highlighted that the outlook would have been even more tough in absence of a considerable, coordinated and unprecedented monetary and fiscal response to the disease in Australia.
To recall, the government and the RBA have amassed a huge fiscal-monetary support package worth over $320 billion (~16.4 per cent of the GDP) to enable firms and households sail through the crisis.
The ABS stated in a recent survey report that the coronavirus pandemic has affected household finances of nearly 45 per cent of Australians ageing 18 years and above from mid-March to mid-April.
According to the RBA, the fiscal and monetary policy actions are currently supporting the nation’s economy by:
- keeping the vital connections between enterprises and their employees,
- supporting people's incomes,
- keeping borrowing costs low, and
- underpinning the supply of credit to households and businesses.
The bank emphasized that the Australian banking system, together with its robust buffers of liquidity and capital, is supporting the nation’s economy withstand this difficult phase.
Yield Target on 3-Year AGS Maintained at 0.25%
The RBA maintained the target yield on 3-year AGS (Australian Government Securities) at 0.25 per cent and notified that the functioning of government bond markets has strengthened. On the back of these developments, the central bank has reduced the size and frequency of bond purchases, which have amounted to about $50 billion to date.
However, it is worth noting that the central bank is prepared to increase the bond purchases again if necessary, to make sure the bond markets stay functional and to achieve the target yield on 3-year AGS.
The Central Bank has also decided to expand the range of eligible collateral for open market operations to incorporate AUD securities issued by non-bank organizations having an investment grade credit rating.
Inflation to Stay Below 2% for Few Years
The central bank anticipates inflation to remain under 2 per cent over the coming few years. Although the CPI increased to 2.2 per cent year on year in the March 2020 quarter, the Central Bank expects it to turn negative in the June quarter temporarily due to deferrals of various price increases, the introduction of free child care and fall in oil prices.
Additionally, the inflation is likely to be in the range of 1 to 1.5 per cent in 2021 in the baseline scenario, gradually increasing afterwards.
Unemployment Rate May Reach 10% in Subsequent Months
Considering the baseline scenario, the Central Bank expects the unemployment rate to reach at around 10 per cent in the forthcoming months, staying above 7 per cent at the end of 2021. Any rate below this is only possible if the fall in labour demand is complemented by a greater decline in average hours worked, instead of people losing their jobs.
A recently released data by the ABS demonstrates a gloomy image of the Australian labour market, that has been hard hit by the COVID-19 crisis. The data suggests that the Accommodation and food services industry saw a fall of about 1 in 3 paid jobs from mid-March to mid-April, becoming the most impacted industry by COVID-19.
As per the ABS, the five weeks after Australia logged its 100th confirmed coronavirus case i.e. between 14th March and 18th April 2020, the total employee jobs declined by 7.5 per cent; however, total wages paid by employers shrank by 8.2 per cent.
Moreover, the data showed that Accommodation and food services industry and Arts and recreation services industry lost the most jobs by 33.4 per cent and 27 per cent, respectively.
On the brighter side, the Australian PM Mr Scott Morrison has lately announced that he intends to bring back one million jobs as soon as this Friday by opening up the economy. The PM’s aim is to enable people to get back to their jobs in the coronavirus-safe economy, with employees, employers and businesses having the tools to cope with this challenging environment.
According to Mr Morrison, although Australia has flattened the coronavirus transmission curve with a considerable fall in the number of fresh cases, the unemployment curve remains a big challenge for the Australian economy.
The RBA expects a stronger recovery in the Australian economy only if there is further significant progress in containing COVID-19 in the near term and sooner return of the nation to normal economic activity. However, with 72 per cent of businesses anticipating an adverse impact of coronavirus over the coming two months, the recovery path is to be closely monitored.
There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
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