AUS
NZ
UK
CA
USA
IND
Summary
- The Australian economy, which started on a recovery journey after a contracting June quarter, is experiencing a slowdown post Victorian lockdowns.
- The Reserve Bank of Australia had kept the monetary policy settings unchanged at its last meet and is set to release a new set of forecasts for the economy next month.
- The Board is stressing on how additional monetary policy easing could support the economy in these challenging times.
As largely expected, the Reserve Bank of Australia (RBA) kept monetary policy setting untouched at the October Monetary Policy Decision on 6 October. These unchanged parameters include cash rate target, the yield on three-year Australian Government bonds, and expanded Term Funding Facility.
The monetary policy meeting coincided with the Federal Budget, which was also unveiled on Tuesday after a six-month delay due to the pandemic. The budget is directed to spur economic growth and jobs in the Australian economy.
Federal Government has forecast shortfall of ~$213 billion in FY 2021. The push to wage subsidies, infrastructure development, and manufacturing are expected to push debt and fiscal to higher bound levels in the wake of a pandemic.
In this financial year, the Government expects to spend around 35% of GDP, which was approximately 26% at the time of the Global Financial Crisis. The income tax cuts by the Government are expected to give a boost to consumption.
The Government will also provide subsidy to the businesses that hire young Australians as they seek to eradicate higher unemployment among young Australians, who are hit hard due to pandemic. Welfare payments like JobKeeper had been extended until March 2021, among other payments.
The global economy is recovering
RBA asserted that the global economy is coming out of the pandemic-led contraction, but the recovery is dependent on the containment of the virus. In China, economic conditions have improved considerably.
Inflation, on global terms, remains under the target of Central Banks. Economic recovery is being supported by accommodative financial conditions. The Board also acknowledged that asset prices had increased substantially despite the uncertainty on economies.
With policy rates at lower bound levels, the interest rates for businesses and households are also low along with bond yields. The domestic currency remains just below the peak of recent years.
Australian economy
Australian economy had gone through a sharp contraction in the June quarter with output declining 7%. But the magnitude of fall in output was smaller than most of the countries. The virus outbreak in Victoria has impacted the recovery, while recovery remains on track in other states.
The Reserve Bank of Australia is expecting that recovery would not be even, and bouncing back output to 2019 end levels would take some time. Over the past few months, the labour market has improved, and the unemployment rate is expected to peak at a lower level than previously anticipated.
RBA will release its new forecast next month. It expects unemployment and underemployment are slated to remain high for an extended period. It was also understood that the Government balance sheet is in good shape for fiscal intervention.
The Australian economy has been supported by fiscal policy over the past six months. RBA also told that fiscal and monetary policy would be needed to support the economy during challenging times.
Borrowing costs and credit
RBA’s policy measures are working as expected and maintaining low borrowing costs and supply of credit to household and businesses. Australian financial system is in a highly liquid position with borrowing costs at record low levels.
Under the Term Funding Facility, the bank has advanced $81 billion of low-cost funding to lenders, who fall under authorised-deposit taking institutions. It has also provided funding of another $120 billion under the facility.
Government bond markets are working as expected along with an increase in issuance as Government continues to spend amid the crisis. In September, the Reserve Bank bought an additional $2 billion of Australian Government bonds to support 3-year yield target.
Since March this year, the Reserve Bank has spent $63 billion on purchase of Government securities. As markets are pricing possibility of monetary policy easing, the yields on 3-year bond have fallen below the target recently.
The Board’s view
The board is committed towards supporting jobs, businesses and incomes in Australia. The policy measures of the bank have helped to keep the borrowing cost lower, aided by the decision to expand the Term Funding Facility.
They reckoned that tackling the high unemployment situation in the Australian economy remains a national priority. The Board is committed to maintaining the accommodative policy settings and cash rate at current levels until any progress is visible in full employment and inflation target range.
They also continue to stress on how additional monetary policies could help the economy recovering.
