RBA Not Considering Further Rate Cuts, More Easing Via QE If Needed

--Economy To Become Noticeably Smaller Due To Sharp Population Slowing

By Sophia Rodrigues

The Reserve Bank of Australia is not contemplating a further reduction in interest rates after lowering the cash rate target to 10bps and will provide any further stimulus if required through Quantitative Easing.

In the quarterly Statement on Monetary Policy published Friday, the RBA said its focus over the period ahead will be on the government bond purchase program.

“If the circumstances require, the Board is prepared to do more and undertake additional purchases,” the RBA said.

“At its future meetings, the Board will be closely monitoring the impact of bond purchases on the economy and on market functioning, as well as the evolving recovery from the pandemic, including the outlook for jobs and inflation.”

The RBA reiterated Governor Philip Lowe’s comments on Tuesday that it sees little to gained from short-term interest rate moving into negative territory, and continue to view a negative policy rate as “extraordinarily unlikely.”

In the Statement, the RBA’s baseline forecasts for the economy is little-changed from August, except for the unemployment rate, but this is after taking into account recent cuts in interest rates, expansion of Term Funding Facility and QE program. The latest forecasts also incorporate a slightly lower exchange rate.

On Tuesday, the RBA lowered the cash rate target to 0.1% from 0.25%, and cut interest rate on Term Funding Facility to 0.1%. The RBA also lowered interest rate on Exchange Settlement balances to zero from 0.1%, and on three-year government bond target to 0.1% from 0.25%.

In addition, the RBA launched A$100 billion government bond-buying program that will be completed in a period of six months.

The RBA said its monetary policy measures package will support economic activity and job creation through the normal transmission channels.

“The exchange rate will also be lower than otherwise,” the RBA said.

The RBA’s baseline forecast is for GDP to recover over coming quarters at a faster pace than expected in August but settle at 5% growth by the end of 2021 at to its pre-pandemic level.

An important change in the forecast is a material downward revision to population growth forecast. In line with Treasury forecasts, the RBA now expects 0.2% population growth in 2020-21, and 0.4% growth in 2021-22. This would be the slowest rate of population growth since the First World War.

The sharp slowing in population growth would lead to a noticeably smaller economy at the end of the forecast period than anticipated prior to the pandemic, the RBA said.

The RBA’s baseline scenario sees the unemployment rate at 6% by the end of 2022. In the upside scenario, the jobless rate is expected to fall to 5.5% by end of 2021 but in the downside scenario it is expected to be at an elevated level of 8.5% even until the end of 2022.

The drivers of growth in the near term are expected to be household consumption and public demand. The contribution of business investment to growth is also expected to increase across the forecast period. Exports are set to contribute to growth over coming years, but by less than expected at the time of the August Statement.

Among the many uncertainties in the forecast, the most significant one, apart from the course of the pandemic is around the labor market.

“The amount of spare capacity in the labour market, and the speed at which this spare capacity is absorbed, are both significant sources of uncertainty,” the RBA said.

The other uncertainties include consumer spending behaviour, health of small businesses, outlook for administered prices and government subsidies.  

--Contact: Sophia@centralbankintel.com