MNI INSIGHT: RBA Eyes Fiscal Stance Before Next Policy Moves

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia will consider its next policy

move in the light of the government's fiscal plans to be published this week,

with rate cuts and unconventional measures on the table to fight what it sees as

a potential deflationary shock from the slumping oil price even as it hopes for

a relatively quick restoration of output in China, MNI understands.

     The need for monetary policy measures will be largely dependent on the size

of the fiscal package set to be announced by Canberra, but a 25 bps cut on Apr.

7 is currently 98% priced in by markets.

     The Bank, which cut its benchmark rate to 0.5% on March 3, has indicated

that if rates are cut to 0.25% the next easing move would be unconventional

monetary policy, with government bond purchases the most likely tool.

     The Bank has no set formula for the quantity of bonds it could buy, and is

focused more on the outcome - particularly maintaining employment -- than the

volume of purchases required to achieve this.

     The Australian Treasury estimates coronavirus will slash 0.5 percentage

points from Q1 growth, with the bushfires set to shave a further 0.2pp. In Q4,

growth was 0.5%.

     While discounting the January bushfires as a temporary hit to the economy,

the RBA's focus is now entirely on the impact of coronavirus.

     The RBA also sees plunging oil prices suppressing inflation and keeping a

lid on any shortage-driven price hikes. It is optimistic that Chinese production

can ramp up quickly and limit disruptions to the domestic Australian supply

chain, also suppressing potential price hikes from gouging.

     Despite the hope for a quick rebound in China, the RBA is more concerned

about Europe. Although this will have less of a direct impact on Australia, it

will sap global demand.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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