RBA unchanged in August as uncertainty increases

The Reserve Bank of Australia Board kept its policy settings unchanged at today's meeting, maintaining the targets for the cash rate and 3-year Commonwealth Government bond yield at 0.25%. However, the decision statement from Governor Philip Lowe outlined that the RBA will tomorrow recommence its bond purchases that have been on hold since early May to "ensure that the yield on 3-year bonds remains consistent with the target". 

Starting on the global economy, Governor Lowe's comments were little changed in noting that the worst of the contraction in output across economies had now passed, though he cautioned that the recovery would likely only be gradual and was contingent upon the success of containment measures to control the virus. Particular mention was made of China's production-led recovery reported in its recent GDP growth outcome for the June quarter of 11.5%q/q. On global markets, the governor upgraded his assessment of financial conditions from "have improved" last month to "remain accommodative" as he continued to cite lower volatility and debt and equity raisings as the by-product.

Turning to domestic considerations, consistent with recent commentaries from the RBA, the governor reiterated that its policy stance was working effectively, leading to a "very high level of liquidity in the Australian financial system" and borrowing costs that were now at historical lows. Contributing to this had been the $14bn in additional drawings from the Bank's Term Funding Facility since the Board last met. On the bond market, the governor noted that normal market functioning had been taking place alongside recent issuance by the AOFM, but with yields on 3-year maturities having been "a little higher than 25 basis points over recent weeks" the RBA has elected to recommence its bond purchases tomorrow and will undertake further purchases "as necessary".

Ahead of Friday's quarterly Statement on Monetary Policy, the governor assessed that, despite the recent reinstatement of lockdown controls in Victoria, the economic downturn "is not as severe as earlier expected and a recovery is now underway in most of Australia". For 2020, GDP growth is expected to contract by 6% before lifting by 5% in 2021, which has been downgraded from its earlier forecast of a 6% rise. The unemployment rate is now seen staying slightly more elevated and for longer ending 2020 at 10% compared to its previous expectation of 9% as a result of the impact of the Victorian situation and more Australians returning to the labour force. The Bank will also present an upside and a downside scenario to its baseline outlook on Friday.

Governor Lowe also welcomed the recent announcements from the Federal Government around the extensions of its key income support measures but noted that it was "likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market". On the monetary side, the governor concluded by saying that the Board's accommodative stance will be maintained for "as long as it is required".