MNI POLICY: RBA Sees 10% Contraction In Economy In H2: Minutes

--Commercial Property Could Be Australia Financial Stability Risk

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia sees the economy contracting

by 10% in the first half of 2020, driven by a 15% downturn in household spending

in the Q2, before seeing the beginning of a recovery in the second half of the

year, the minutes of the May 5 meeting show.

     The RBA is satisfied with the result of the measures put in place following

the Covid-19 break, including the more than AUD50 billion spent buying bonds,

and while it is scaling back purchases, the central bank remains prepared to

spend more to achieve the target of a yield of 0.25% on the benchmark Government

three year bond.

     Rates were left on hold at 0.25%, with the target yield on the benchmark

3-year bond also maintained at 0.25% at the meeting.

     Unemployment is expected to reach 10% in the June quarter, and would be

significantly higher if not for Government programs subsidising businesses to

keep workers on their books.

     Household consumption was expected to decline 15% in the second quarter

with GDP to contract around 10%. Inflation is forecast to turn negative due to

falling oil prices and free childcare, falling by 2.25% in the June quarter.

     --PROPERTY RISKS

     The RBA identified the commercial property sector as a key risk to

Australia's financial stability, seeing "vulnerabilities" due to lower

valuations which will pose challenges for leveraged property investors and

developers

     A larger amount of new office space expected to be completed in Sydney and

Melbourne this year, although "Demand was not expected to keep pace with

stronger supply and it was likely that vacancy rates would rise and office rents

would fall," the minutes said.

     Retail property was also vulnerable, and the impacts were likely to be

exacerbated by social distancing measures.

     The RBA is less concerned about the resilience of Australian households,

estimating that one third of households have mortgage prepayment buffers of

three years or more.

     While a smaller percentage of mortgage holders had no buffer, loan

repayment deferrals would cushion the impact of arrears "for at least the

following six months."

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

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