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MNI (Sydney)
SYDNEY (MNI)

The latest round of lockdowns in Victoria will be a drag on the recovery, but overall, the impact of the coronavirus will be less severe than initially expected, the Reserve Bank of Australia said in the August Statement of Monetary Policy published Friday.

The RBA also said is still viewed negative interest rates as "extraordinarily unlikely" in Australia and noted that there was no case to intervene in foreign exchange markets to influence the value of the Australian dollar.

In updated economic forecasts based on the stage four pandemic lockdowns introduced across Victoria this month, the RBA sees a "peak to trough" decline in GDP of 7% over the first half of 2020, which, although severe, is not as bad as first feared, largely due to the fiscal support from the Federal Government.

POLICY ACTIONS

On monetary policy, the Statement re-affirmed the RBA's commitment to its program of measures announced in March, when it cut official rates to a record low 0.25%, introduced a bond buying program to control the yield on Australian Government Bonds, and set up a Term Lending Facility for banks to borrow at low interest.

While not ruling out adjusting this package in the future if circumstances demanded, the RBA is yet to publicly entertain the use of any unconventional monetary policy, saying that such measures "come with costs too."

On the domestic currency, which has increased from US57 cents in late March to US72 cents in August, the RBA says its value is "broadly in line with its fundamentals" such as the terms of trade and interest rate differentials, and this meant there was no case for central bank intervention even though this would put downward pressure on the AUD.

"Intervention in such circumstances is likely to have limited effectiveness," the statement said.

The statement also acknowledges a 32% increase over the last three months in the benchmark price of iron ore, Australia's biggest export commodity, with strong demand from China.

SCENARIOS

The RBA's updated economic forecasts looked at three scenarios, with a baseline scenario assuming that the heightened restrictions in Victoria are in place for the announced six weeks and then gradually lifted.

It assumes that in other parts of the country, restrictions continue to be gradually lifted or are only tightened modestly for a limited time, although restrictions on international departures and arrivals are assumed to stay in place until mid-2021.

Under this scenario, GDP is expected to contract by around 6% over the year to December 2020, but then grow by around 5 per cent over 2021. This compares with the previous forecast of 6% growth next year.

The unemployment rate is expected to rise to almost 10% over the next six months and gradually decline to around 7% by December 2022.

Underlying inflation, which turned negative in the June quarter, is expected to remain below 2 per cent over the next two of years.

MNI Sydney Bureau | +61-405-322-399 | lachlan.colquhoun.ext@marketnews.com
MNI Sydney Bureau | +61-405-322-399 | lachlan.colquhoun.ext@marketnews.com

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