RBA maintains cash rate and yield targets
The Reserve Bank of Australia Board "reaffirmed" the targets for the cash rate (0.25%) and 3-year Australian Government yield (0.25%) at its monthly policy meeting today. On the fundamentals, the decision statement from Governor Philip Lowe outlined that while "considerable uncertainty" attends the near-term outlook, the impact of the COVID-19 outbreak is expected to lead to "a very large economic contraction" in the June quarter, with the unemployment rate anticipated to "increase to its highest level for many years". Governor Lowe's assessment was that the recent policy responses from the Bank and the nation's fiscal authorities would "help ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed", albeit acknowledging that the interim would be "a very difficult period" for households and businesses.
With the cash rate having been lowered to its effective lower bound, the focus of this statement from a policy perspective was around the 3-year yield target. The governor noted that since the Bank commenced bond purchases (March 20), $36bn in Commonwealth and semi-government securities had been added to its balance sheet, with the effect of keeping the 3-year Commonwealth bond yield around the 0.25% target and improving market functioning. While noting that the Bank "will do what is necessary to achieve the 3-year yield target", the governor added that if liquidity conditions were to continue to improve, its bond purchases were likely to become "smaller and less frequent". The basis for that assessment so soon after the program has commenced appears to be that its earlier actions support liquidity conditions through daily repo operations had been successful and that with its $90bn Term Funding Facility only just starting to be drawn upon, that situation would be likely to continue, ensuring that funding costs for the banking system would remain low and allow that to be transmitted into the real economy through lending to businesses and households.
In the concluding paragraph, the governor reiterated the forward guidance around the cash rate target that it would not be raised "until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band". The minutes from today's meeting are scheduled to be released on April 21.
