RBA on hold in July; staying the course

As expected, the Reserve Bank of Australia Board left its policy settings unchanged at today's meeting, maintaining the 0.25% targets for the cash rate and 3-year Commonwealth Government bond yield. 

The decision statement from Governor Philip Lowe opened with his assessment of global economic conditions. While the worst of the impact on economic output from the pandemic was seen to have passed, the outlook remained uncertain as it was dependent on the success of countries' efforts to contain the virus, with the divergence in outcomes on that front currently being seen noted. On the markets, the governor inserted a new line into the statement to highlight the disconnect between recent price action and the fundamentals by noting that asset prices have "risen substantially despite the high level of uncertainty about the economic outlook".

In the domestic markets, the governor continues to assess that the government bond markets are functioning effectively, and with the markets respecting the yield target on 3-year maturities, the RBA had been able to pause its bond purchases. Nonetheless, the commitment to "scale-up its bond purchases again" should that be warranted remains. Furthermore, liquidity conditions are seen as ample, helped by some $15bn in drawings under the RBA's Term Funding Facility with more expected to follow in the months ahead. 

On the domestic economy, in light of the severe dislocation that has occurred in the labour market resulting in the loss of around 800,000 jobs, the governor made the observation that the damage would have been even greater in the absence of the government's fiscal support measures. Positive signs identified were the decline in hours worked slowing sharply in May compared with April as well as the strong rise in retail sales recorded in May. Overall, though, the governor continues to assess the recovery as being "highly uncertain" and together with uncertainty prevailing over the path of the virus, these factors were making "households and business cautious" weighing on both consumption and investment intentions. 

In conclusion, the governor reiterated the Bank's forward guidance that rates will not be increased until progress is made towards full employment and inflation is on track to sustainably return to the target band of 2-3%. This forward guidance is reinforced through the yield curve target, and with the cash rate at 0.25%, the governor notes that these actions "are keeping funding costs low and supporting the supply of credit to households and businesses". Certainly, the RBA will be maintaining its accommodative stance for the foreseeable future, though Governor Lowe also highlighted that ongoing fiscal support "will be required for some time".