Out of options on RBA rates

Given the gloomy coronavirus outlook the Reserve Bank could keep Australia’s historic low cash rate at 0.25% for the next three years

5 May 2020 | Shane Oliver, AMP Capital

As widely expected, at its May meeting the RBA made no further changes to monetary policy having undertaken a substantial easing in March via a cut in the cash rate to 0.25%, targeting the three year bond yield at 0.25% to be supported by quantitative easing and providing funding to the banks for three years at just 0.25%.

So right now, and given the expected and still unfolding hit to the global and Australian economies from coronavirus related shutdowns, the RBA is basically in a wait and see mode.

The Bank reiterated that it has scaled back the size of its bond purchases as the 3-year bond yield is around its target of 0.25% and as the functioning of the bond market has improved. So far it has purchased around $50 billion of bonds but has indicated that its prepared to scale them up again to do “whatever is necessary” to ensure functional bond markets and achieve the 3-year yield target.

It also announced a slight broadening in the range of corporate debt that it is prepared to accept as collateral as part of its open market operations.

RBA sticks to forecast of a 6% hit to 2020 GDP

RBA Governor Lowe restated the base case Australian economic forecasts that he first ran through in his 21st April speech. These basically see a 10% hit to growth in the first half of the year with around a 6% decline in GDP for 2020 as a whole, followed by 6% growth next year, unemployment to peak at around 10% in coming months and still be above 7% by end 2021, and inflation going negative in the current quarter and remaining below 2% over the next few years. These are fairly similar to our own forecasts and assume some easing in the lockdown in the months ahead.

The RBA repeated its commitment to do “what it can” to support jobs, incomes and businesses and affirmed that it will “not increase the cash rate until progress is made towards full employment and it is confident that inflation will be sustainably within the 2-3% target band.”

Cash rate boffins could now start watching grass grow

For those focussed on the RBA’s cash rate, the next few years are likely to be pretty boring. The cash rate is at the RBA’s long stated lower bound and there is no value in taking it negative, so it won’t be cut any further.

We are yet to see the full extent of the hit to the economy from the coronavirus related shutdowns and it will take several years to fully recover so a rate hike is years away.

We expect the cash rate to be stuck at 0.25% for at least the next three years.

The extraordinary monetary and fiscal policy response seen from March won’t stop the hit to the economy from the shutdowns and a sharp rise in unemployment. But they should help minimise the fall out in terms of jobs, incomes and businesses such that we can recover more quickly once the virus is better controlled.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital