RBA maintains accomodative stance
As expected, the Reserve Bank of Australia Board made no changes to its policy stance at Tuesday's meeting, maintaining the 0.25% target for both the 3-year Commonwealth Government bond yield and cash rate.
The decision statement from Governor Philip Lowe reiterated many of the themes of his recent communications, most notably that its policy measures were assessed to be working effectively. In particular, the governor noted; "the government bond markets are operating effectively and the yield on 3-year Australian Government Securities (AGS) is at the target of around 25 basis points". In our preview, we highlighted that the RBA's bond-buying had increased by only $0.6bn to $51.3bn since the May meeting — a point acknowledged by the governor in today's statement — though with market functioning having improved and with the 3-year yield anchored to the target, it has not needed to do any more at this stage, but the commitment to "scale-up its bond purchases again" should that be required remains in place. The Bank will also be taking this as a sign that the markets are reacting to the forward guidance they introduced back on March 19 that the yield target will be kept in place "until progress is being made towards the Bank's goals of full employment and the inflation target". Furthermore, liquidity conditions domestically were being supported by the use of the RBA's Term Funding Facility, with banks drawing "around $6 billion" from that facility since its inception. In a nod to improved financial conditions offshore following the actions of other central banks to improve the flow of liquidity, the governor noted that "volatility has declined and credit markets have progressively opened to more firms".
On domestic economic conditions, the governor was reasonably balanced in his overall assessment. While he acknowledges that the nation is "going through a very difficult period and is experiencing the biggest economic contraction since the 1930s" he went on to note that "it is possible that the depth of the downturn will be less than earlier expected" on the basis that infection rates of COVID-19 had "declined significantly", "some restrictions have been eased earlier than was previously thought likely", while there had been signs of a stabilisation in hours worked and a lift in "some forms of consumer spending". However, it is the governor's assessment that the shape of the recovery "remains highly uncertain" and that the pandemic "is likely to have long-lasting effects on the economy". Of course, the labour market is going through a very painful adjustment and the governor pointed out the linkages to weakness in household spending and investment plans. In the near term, the governor again stressed the importance of the information that indicators of household and business confidence will convey in terms of gauging the pace of the recovery.
In looking ahead, Governor Lowe noted that both monetary and fiscal support "will be required for some time". On the monetary side of that equation, the RBA's actions will be focused on "keeping funding costs low and supporting the supply of credit to households and businesses" and that its accommodative policy stance "will be maintained as long as it is required".
