Where is the economy heading to- RBA’s Eye  

  • Apr 08, 2020 AEST
  • Team Kalkine
Where is the economy heading to- RBA’s Eye  

With supply and trade disruptions, schools and businesses closed, people working remotely, and events being cancelled, the coronavirus outbreak is dragging down economies around the world.

The virus has bumped markets, businesses, financial institutions and households all at the same time, making it much more acute compared to the global financial crisis in 2007-08. Restrictions on movement to stop the virus spread have forced several businesses in retail, tourism, transport and hospitality to shut their doors.

Covid-19 has affected more than 1.28 million people worldwide, killing ~72,776 people to date. And, the epidemic is expected to give a severe injury to global economic growth in 2020.

OECD has forecast that global growth could fall to a low of 1.5% in 2020, in a downside risk scenario wherein the epidemic spreads from China to other countries.

Global debt is over 322% of GDP, about 40 percentage points higher than at the start of the financial crisis of 2008, while across sectors, debt went up by US$10 trillion in 2019, as governments take measures to fight the coronavirus outbreak, according to a statement released by IIF on 7 April 2020.

The Debt Monitor of the institute reports that more than US$20 trillion of loans and bonds would be due for payments around the world by the end of 2020. The debt burden is expected to increase dramatically in 2020 due to growing stimulus measures being taken to contain the Covid-19 impact.

Markets have hit record lows worldwide with plunging stock prices and bond yields during the past two months due to extreme volatility induced by the pandemic fears. However, markets have shown some positive signs recently, partly due to central bank measures and levelling-off of virus cases.

ALSO READ: Macro Catalysts Driving Volatility in the Australian Share Market

Governments are indulging in large stimulus packages to aid their economies, which could slip into recession. The global economy is expected to recover amid large stimulus packages and liquidity easing measures taken by governments, once there is no more rise in coronavirus cases.

RBA holds OCR in April meet

RBA has been taking measures to improve liquidity in the system to enhance the flow of credit in the economy through open market operations.

In its policy meet on 7 April 2020, the Board restated its official cash rate to be at 0.25% and the yield on 3-year government bonds of 25 basis points including other stimulus packages announced on 19 March 2020.

RBA has taken a slew of measures to pump more money into the system due to demand and supply disruptions amid coronavirus. The central bank has already reduced its cash rate to 0.25% in its last policy meet in March, and on 19 March 2020, it took a step to keep the 3-year Australian Government bond yield at 0.25% by buying bonds through the market via regular auctions. The move is aimed to support businesses and benefit borrowers through a low interest rate by reducing funding costs of financial institutions.

Source: ASX

Short-term bonds have become cheaper and are nearing the target level such as the 3-year Australian government bond is showing yield close to 0.4% as compared to around 0.3% a month ago.

On 7 April 2020, RBA Governor Philip Lowe stated that the 3-year government bond yield is now around the target level and assured to reach the 3-year yield target, with the target likely to be in place until full employment and inflation goals are achieved.

The bank has bought approximately $36 billion worth of government bonds, including bonds issued by states and authorities since the introduction of the yield target. Additionally, RBA has pumped significant liquidity into the system via daily open market operations to save the domestic economy from the credit crunch.

In the policy meeting, Governor Lowe asserted on smaller and less regular purchasing of government bonds as well as smaller-scale daily open market operations in the near-term, if the conditions keep on improving.

ALSO READ: Is ‘flattening the curve’ on the cards for Australia?

On 6 April 2020, first drawings were made under the term lending facility of RBA. This is expected to decrease funding costs of banks and give lenders an incentive to help small and medium-sized businesses with credit. The authorised deposit-lending facility offers at least $90 billion in funding.

Bleak outlook for the economy

High economic contraction and largest unemployment rates are expected for the domestic economy. Uncertainty prevails for the near-term outlook, contingent on the accomplishment of the efforts to contain the virus and the period up to which social distancing measures are taken.

On 8 April 2020, global credit rating agency S&P 500 downgraded Australia’s ‘AAA’ credit rating outlook to negative from stable due to anticipated deterioration of the government’s debt position amid its large stimulus measures. The agency believes that Australia is facing downside fiscal and economic risks to Covid-19 outbreak. S&P predicts that the economy of Australia would go through a recession for the very first time in around three decades.

Fitch Ratings has cut ratings of Australia’s big four banks (ANZ, Commonwealth Bank, NAB and Westpac) to A+ from AA- due to expectations of a significant economic shock in the first half of 2020 in Australia, given the measures being taken to fight coronavirus. The agency expects a modest recovery in the second half of 2020, extending to 2021.

The monetary and fiscal stimulus measures taken by Australia are expected to soften the economic contraction and will put the economy in a better place to recover. The steps are already giving considerable help to businesses and households with jobs and incomes.

The RBA Board decision is not to increase the cash rate target until development occurs with respect to full employment. The bank anticipates inflation to be within the target range of 2% to 3%. Meanwhile, RBA is set to monitor the impact of its unconventional monetary policy measures before cutting the cash rate again.

Interesting Read: Plan of Action on Track to Restore Credit Scenario; 5 Cs of Loan Lending


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