RBA reaffirms its supportive stance
The Reserve Bank of Australia Board reaffirmed its policy stance at its meeting today as it remains committed to providing support to the economy by keeping funding costs at very low levels, while it is also prepared to scale-up its bond purchases again if needed. There were no changes to policy settings announced today, though the RBA has elected to broaden the range of eligible collateral under repo to include corporate bonds at the lower tier of investment-grade (BBB-) or A-3 on short-term notes whereas previously the minimum ratings were restricted to AAA and A-1 respectively.
In today's decision statement, Governor Philip Lowe outlined that with yields on 3-year Commonwealth bonds anchored around the 0.25% target for the overnight cash rate and on the back of improved liquidity conditions, the Bank had tapered the pace of its bond purchases from $7.5bn in the week of the previous meeting (see week 4 in the chart below) to just $1.5bn last week (week 7). However, as anticipated in our preview, the governor gave the commitment that the Bank stood ready to "scale-up these purchases again" and it was prepared to do so to "ensure bond markets remain functional and to achieve the yield target for 3-year AGS". One area of surprise was that Governor Lowe gave no update on the progress of Bank's $90bn Term Funding Facility given that drawings have been going for 4 weeks now having commenced the day before the April meeting. Total drawings under that facility are reported to be around $3.7bn as of mid last week.
Ahead of Friday's quarterly Statement on Monetary Policy (SoMP), Governor Lowe outlined the Bank's baseline scenario for its economic outlook. In line with the detail from his speech two weeks ago, GDP growth is expected to contract by 10% through the first half for an overall decline of 6% across 2020, before rebounding by 6% in 2021. The unemployment rate is forecast to reach a peak of 10% in the months ahead and is then only expected to improve to above 7% by the end of 2021. A deflationary shock is set to hit the domestic economy, with the Bank forecasting CPI to temporarily turn negative in Q2 weighed by the combination of falling oil prices, the Federal government's decision to make child care services free and other cost saving measures announced to support households. In 2021, headline CPI is only seen at a range of 1.0 to 1.5%, well down from its 2.2% pace reported through the year to Q1 in last week's inflation data (see here). Governor Lowe reiterated that Friday's SoMP will present a range of possible scenarios for the economic outlook based on how the COVID-19 spread progresses over the coming period.
