MNI PREVIEW: RBA To Stand Pat In Last 2020 Meet

The Reserve Bank of Australia holds its final meeting of 2020 Tuesday, with no new policy moves expected after what has been an extraordinary year of activity for the central bank.

Although there seems little need for policy action in coming months, the RBA has stated it has room to ease further if needed. However, with Australia's economy recovering, a stronger than expected pick-up could prompt a review of the bank's forward guidance at some point in 2021.

While the RBA has given a clear indication that it is unlikely to increase rates for another three years, its economic forecasts have become more optimistic as Australia has brought the pandemic under control quicker than most and the economy has begun to recover.

The bank has specifically targeted a recovery in employment as its main priority, and the October unemployment rate stood at 7.0%, compared to just over 5% in the early months of 2020.

Total employment is on the increase as the participation rate rises, although the impact of the end of Government job subsidies which are soon set to taper off and end in April 2021 is unclear.

MORE QE IF NEEDED

If the RBA decides more easing is required next year its most likely next move is to increase the size of the QE program. Governor Philip Lowe has consistently ruled out zero or negative interest rates, although the bank could feel the pressure for more rate cuts if the U.S. Federal Reserve were to go move into negative territory.

Over the course of 2020 the RBA has cut official interest rates from 0.75% to a record low 0.1%, purchased more than AUD50 billion in Government securities as part of its yield control program targeting the benchmark three year bond, and more recently announced a AUD100 billion program of Quantitative Easing to purchase longer-dated government bonds.

The RBA has also implemented a AUD200 billion Term Funding Facility for commercial banks to access low cost funding at the cash rate, and reduced the interest rate on Exchange Settlement balances to zero.