MNI REVIEW: RBA Holds Rates, But Flags Further Easing

The Reserve Bank of Australia left policy on hold Tuesday, as widely expected, but said it continues to consider how additional monetary easing can support the labour market and the economic recovery.

The RBA Board decided to keep the official interest rate at a record low 0.25% for the seventh consecutive month. The decision comes just hours ahead of the Federal Budget at which the ruling Liberal Party-led coalition government is expected to announce major fiscal stimulus measures.

The central bank also re-affirmed its program of government bond purchases and made no changes to its funding facility for commercial banks.

BUDGET DAY

MNI's understanding is that the RBA was reluctant to change policy on the same day as the budget, recognising the greater impact of fiscal policy in the coronavirus-damaged economy and the impact of the budget on sentiment.

While acknowledging the sharp 7% contraction in GDP in the June quarter, the RBA said this was less than initially expected and a recovery was underway in most of Australia, although the second wave of the pandemic was Victoria is dragging on growth.

Governor Philip Lowe said in the statement that labour market conditions had improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than earlier expected. "Even so, unemployment and underemployment are likely to remain high for an extended period," Lowe said, adding that fiscal and monetary support would be required for some time.

The bank said its policy package was "working as expected" and underpinning low borrowing costs and the supply of credit to households

The economy had also been supported by a "substantial easing in fiscal policy" and public sector balance sheets remained in 'good shape," which allowed for further government borrowing, the statement said.

MARKET EXPECTATIONS

The RBA has so far purchased A$63 billion in government debt under a yield control program with a targeted yield of 0.25%. The bank noted that the yield on the benchmark three-year bond had fallen to 18 basis points "as markets price in some probability of further monetary policy easing."

Commercial banks have taken up A$81 billion in low cost funding under the RBAs Term Funding Facility, with access to another A$120 billion.