Key Takeaways from RBA’s May Monetary Policy Meeting Minutes

The existing policy settings involve a cash rate target of 0.25 per cent and yield target on 3-year Australian Government bonds at 0.25 per cent. The Central Bank is unlikely to change the three-year yields and cash rate targets until any progress has been made towards its goals of the inflation target and full employment.

The RBA board members discussed a wide range of indicators in their latest monetary policy meet, that are being highlighted in the recently released minutes. Given this backdrop, let us quickly scroll through key takeaways:

Measures Against COVID-19 Causing Economic Contraction Across Globe

The minutes stated that although the global economy is anticipated to recover in 2H20, a large contraction is being expected by the IMF for 2020 as a whole. RBA observes measures undertaken to contain COVID-19 spread as the key cause of a deep economic contraction arising across the globe.

The Bank provided examples of the following economies that witnessed contractions in March 2020 quarter amid lockdowns and other restrictions:

• China, 10 per cent↓
• US, 1.2 per cent↓
• Euro Area, 3.8 per cent↓

Moreover, the Central Bank notified that the GDP was likely to contract between 10 to 15 per cent from peak to trough in major advanced economies, mostly in June 2020 quarter; however, some of the effect has been visible in March quarter figures.

At the bright side, the Bank sees some parts of the Chinese economy recovering in March with an ease in restrictions. For instance, the industrial production recovered robustly in China in March approaching towards pre-outbreak levels, along with exports that rebounded to a large extent.

Also Read! Economic Charter: China under Scan

Different Scenarios for Australian Economy

RBA minutes highlighted three different scenarios for the Australian economy on the basis of sooner or later lifting of restrictions in the nation: baseline, upside and downside.

The Central Bank discussed a baseline scenario in which the lifting of social distancing restrictions is likely to continue over the coming months; however, restrictions on national border controls and large gatherings is expected to remain in place towards the end of 2020. The central Bank anticipates the economy to gradually recover over 2H20 under the baseline scenario.

With Australia attaining a quick decline in fresh COVID-19 cases and some states relaxing restrictions, the Central Bank also sees an upside scenario in which most of the restrictions in the domestic activity would be lifted sooner. In this scenario, the Bank expects a faster recovery in the economy in comparison to the baseline scenario.

The downside scenario would occur if there would be a delay in relaxing restrictions or the need to re-impose the restrictions. In this case, the Bank anticipates slower recovery even if COVID-19 spread is contained.

The below figure demonstrates the cases of both upside and downside scenario:

Social Distancing Measures Benefitted March Retail Spending

With households stocking up pharmaceutical and grocery items while preparing for potential supply chain disruptions and social distancing, the retail spending increased robustly in March 2020. The Central Bank mentioned that retail sales experienced one of the biggest monthly rises in March; however, it fell in April.

As per the ABS, the seasonally adjusted retail sales increased by 8.2 per cent in March, backed by robust sales in food retailing category.

Moreover, with travel restrictions and social distancing measures in place, the spending on services and other categories of consumption was also expected to have declined. The Central Bank further anticipates a contraction of about 15 per cent in the household consumption over 1H20.

Labour Income Growth Likely to Decline in Near-Term

RBA noted that the employment data did not show signs of contraction in March 2020 with the unemployment rate being at 5.2 per cent; however, ABS payroll data for the five weeks to mid-April demonstrated a substantial fall in the number of paid jobs across several industries, including entertainment, tourism and dining out. Besides, the job advertisements fell in March and April.

Must Read! Australia's April Employment Report Card – Fair Versus Reasonable

The Central Bank anticipates a decline in labour income growth in the near term; however, expects social assistance payments to offer some boost to household income.

The minutes highlighted that the unemployment rate is likely to peak at around 10 per cent in the June quarter, which would have been higher in absence of the government’s JobKeeper scheme.

Functioning of Financial Markets Improved over April

RBA highlighted that the functioning of the financial markets has improved over April, with monetary policy measures working broadly as expected.

The Central Bank further mentioned that it has bought a total of around $50 billion of semi-government and government securities since mid-March; and the yield on 3-year government securities has remained low at 0.25 per cent as per the target.

Besides, the Bank observed a reduced demand for liquidity from its counterparties and improved daily open market operations. The central Bank also observed a strong pick-up in business credit growth during March.

The Bank sees these variations as a sign of ample liquidity in the Australian Banking system, which has been boosted by the Bank’s policy package.

Simply put, RBA believes its policy package is working broadly as expected and is likely to revive the Australian economy in late 2020, supported by the massive fiscal packages, ease of restrictions and a continued fall in infection rates.

Also Read! Shedding Light on Market Mood in AU Property Space