Analysis: Expect Optimism from RBA As Australia Flattens Coronavirus Curve

• Published on
• 04 May 2020, 07:32 PM

By Sophia Rodrigues

The Reserve Bank of Australia is expected to leave key monetary policy decisions unchanged on Tuesday but the tone of the statement is likely to be positive compared to the month before.

The RBA’s board meeting is due at 1430 hours local time Tuesday where the cash rate target and the three-year government bond target is expected to be left unchanged at 0.25%.

This is the first meeting since the coronavirus was declared a global pandemic where the RBA board will have a better insight into the economy and a set of updated forecasts to back their discussions on the economy.

In April, Governor Philip Lowe said the RBA’s thinking was that output would fall by around 10% over the first half of 2020, total hours worked would decline by 20% and unemployment rate would rise to 10% by June.

But the prediction was a rough one, made amid considerable uncertainty about the near-term outlook for the economy.

Lowe also discussed a scenario where the various restrictions are progressively lessened by the middle of the year, and mostly removed by later in the year. In such a scenario, he expected the economy to bounce-back in the second quarter.

Between then and now, Australia has made considerable progress in containing the spread of the virus and managed to flatten the curve earlier than it anticipated. The progress means restrictions are slowly being lifted, with possibility that Australia will soon open its borders with New Zealand.

This means there is now a possibility that an optimistic scenario that Lowe discussed last month would become the RBA’s central scenario. In such a scenario, the RBA would expect a stronger recovery on the back of the very large monetary and fiscal support that is in place.

UPSIDE RISK TO LAST MONTH’S FORECASTS

There is thus an upside risk to the RBA’s rough forecast of 10% fall in output over the first half of 2020. The RBA may also no longer expect the jobless rate to rise to around 10% by June because a gradual easing in restrictions could mean some people who were previously stood down and not eligible for Jobkeeper payments might get employed again.

Also backing RBA’s relatively optimistic forecasts would be recent data showing preliminary retail sales for March rose 8.2% m/m, marking the strongest growth on record. Australia’s preliminary international trade data for March also showed a 29% rise, while imports rose 10%.

House prices also rose 0.3% m/m in April, according to CoreLogic data, though activity fell sharply because of live auctions and open homes have been banned.

Also, inflation was higher than expected in the first quarter, with possibility that second quarter inflation may not decline as much as initially expected as Australian Bureau of Statistics has decided on imputation options for certain goods and services.

--Contact: sophia@centralbankintel.com