RBA Maintains Policy Settings Despite Downgrading Outlook

By Sophia Rodrigues

The Reserve Bank of Australia left the cash rate target at 0.25% and other policy settings unchanged on Tuesday and downgraded growth outlook for next year, and inflation outlook, despite saying the downturn is not as severe as earlier expected.

In terms of action, the RBA said it will buy Australian government bonds from the secondary market because in recent weeks the yield on three-year bonds has been a little higher than 25bps.

The RBA’s comments on the economy were a bit confusing. On one hand, it said the downturn is not as severe as earlier expected and recovery is underway in most of Australia. On the other hand, it downgraded growth outlook for next year. In May, the RBA’s forecast was for a 6% fall in output over 2020 and bounce-back of 6% the following year. Now it expects growth of 5% next year.

The forecasts on the labor market were largely unchanged but with a slightly worse outlook later in the forecast period. The RBA expects the jobless rate to peak at 10% later in 2020 but to decline gradually to around 7% over the next couple of years. In May, the forecast was for the jobless rate to gradually fall to 6.5% by June 2022.

The RBA now expects inflation to average between 1% and 1.5% over the next couple of years. This is down from its forecasts in May when it expected inflation to gradually pick up in 2022 from 1% to 1.5% in 2021.

The RBA noted the economy is being supported by the substantial, co-ordinated and unprecedented easing of fiscal and monetary policy, and the government’s recent income support measures were a welcome development.

“It is likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market.”

For the first time in several months, China found a mention in the RBA’s decision statement. The RBA said international trade remains weak “although there has been a strong recovery in industrial activity in China in recent months.”

The RBA reiterated it is committed to do what it can to support jobs, incomes and businesses in Australia.

--Contact: Sophia@centralbankintel.com