Preview: RBA meeting August

The monthly policy meeting of the Reserve Bank of Australia Board takes place today, with Governor Philip Lowe to hand down his decision statement at 2:30PM (AEST). Policy settings will be left unchanged, but there will be considerable interest around the governor's assessment of economic conditions in light of recent virus-related developments in Victoria where a more stringent and longer shutdown has been mandated by the state government. Today's meeting comes ahead of the Bank's quarterly Statement on Monetary Policy (due Friday) that will contain its in-depth assessment of the domestic economy and updated set of forecasts. 

Over the inter-meeting period, we learned that the Board discussed the composition of its policy stance and whether it could have been configured differently. Specifically, Governor Lowe discussed in a speech that potential alternatives included a lower but still positive cash rate target, more purchases of government bonds and different parameters on the Term Funding Facility. The view of the Board was that current settings remain appropriate in the Australian context, though there was a line from July's meeting minutes that stated members would; "continue to assess the evolving situation in Australia and did not rule out adjusting the current package if circumstances warranted". 

That raises the question of what those circumstances might be. Recall that in May's Statement on Monetary Policy the Bank presented three scenarios for the economic outlook; baseline (gradual recovery), upside scenario (faster recovery) and downside scenario (slower recovery). The domestic economy had been broadly outperforming the Bank's baseline outlook, most notably with hours worked declining by around 10% over the June quarter compared to the 20% reduction forecast. However, the baseline scenario assumes that most restrictions (with a few exceptions) are lifted by the end of Q3. A more muted outlook may now be likely due to the reversal of Victoria's reopening, while high-frequency indicators across the other states have been suggesting the recovery is losing momentum. How the RBA reads the situation and assesses the outlook in light of these developments are the key questions this week.  

While the Bank assess its policy stance to be working effectively citing lower funding costs, the enhanced supply of credit to the real economy, and improved functioning in the government bond market, today's statement will reiterate its commitment to maintaining accommodative settings, with the ability to increase its bond purchases. The appreciation of the Australian dollar from its late-March lows has not appeared to be of significant concern to the Board based on recent commentaries.