As was widely expected, the RBA Board maintained its existing policy settings (0.1% targets on the cash rate and 3-year Australian Government bond yield, 0.1% on Term Funding Facility drawings, and the $100bn target on the bond purchase program) at today's December meeting, its final scheduled meeting for 2020. The theme of today's decision statement from Governor Philip Lowe was as our preview had anticipated in that there is reason for optimism, but with caution over the outlook remaining elevated the Board is alert to the downside risks and is "prepared to do more if necessary".
On the global economy, the governor said that the recent news had been "mixed" as the pace of the recoveries underway in Europe and the US lost momentum following a resurgence in the virus, though progress towards the development of potential vaccines had been encouraging. This tension has recently played out in markets, with the governor noting the lift across global equity markets, rising commodity prices and the deprecation of the US dollar as signs that risk sentiment had improved on the vaccine news.
Turning to Australia, while the recent run of data coming in above expectations was "good news" this needed to be balanced against an outlook that foresees an "uneven and drawn out" recovery that remains "dependent on significant policy support". Looking ahead to 2021, the RBA's baseline outlook is for output growth of 5%, meaning that the nation is still around a year away from returning to its pre-pandemic level of GDP. But the focus remains firmly on the labour market and while the strong employment outcome in October was welcomed, it was highlighted that the unemployment rate lifted to 7.0% and that it was likely to rise further. Current RBA forecasts do not foresee an unemployment rate lower than 6% before the end of 2022 and the situation, therefore, remains of significant concern given that it is seen as placing downward pressure on wages growth and inflation over the next couple of years.
With Governor Lowe again reiterating that the Board sees lowering the elevated unemployment rate as "an important national priority" focus was given to how the measures announced at the November meeting would assist in this regard. In short, by lowering interest rates across the borrowing curve, funding costs are now lower; the exchange rate is weaker than otherwise, and asset prices are higher thereby strengthening balance sheets. To emphasise that quantitive easing is now the Board's marginal policy tool, the governor outlined the volume of purchases completed so far in its bond purchase program has been $19bn, with another $5bn going towards supporting the 0.1% yield target. All this contributes to an expanded central bank balance sheet, with the governor noting this has amounted to an increase of $130bn year to date.
The final paragraph reiterated the Board's forward guidance that rates are not expected to be increased "for at least 3 years", while also noting that the size of the bond purchase program is to be kept "under review" and notably will be taking into consideration "the evolving outlook for jobs and inflation".
