MNI: RBA Leaves Key Cash Rate Unchanged At 25 bps - Text

--RBA Statement following the May 5 policy meeting

     SYDNEY (MNI) - The Reserve Bank of Australia left its key benchmark

interest rate unchanged at 25 bps Tuesday. It also reconfirmed the 0.25% yield

target for the 3-year government bond.

     Following is the text of the accompanying statement.

===========================================================================

     At its meeting today, the Board decided to maintain the current policy

settings, including the targets for the cash rate and the yield on 3-year

Australian Government bonds of 25 basis points.

     The global economy is experiencing a severe downturn as countries seek to

contain the coronavirus. Many people have lost their jobs and a sharp rise in

unemployment is occurring. At the same time, the containment measures have

reduced infection rates in a number of countries. If this continues, a recovery

in the global economy will start later this year, supported by both the large

fiscal packages and the significant easing in monetary policies.

     Globally, financial markets are working more effectively than they were a

month ago, although conditions have not completely normalised. This improvement

reflects both the decline in infection rates and the substantial measures

undertaken by central banks and fiscal authorities. Credit markets have

progressively opened to more firms and long-term bond rates remain at

historically low levels.

     In Australia, the functioning of the government bond markets has improved

and the yield on 3-year Australian Government Securities (AGS) is at the target

of around 25 basis points. Given these developments, the Bank has scaled back

the size and frequency of bond purchases, which to date have totalled around $50

billion. The Bank is prepared to scale-up these purchases again and will do

whatever is necessary to ensure bond markets remain functional and to achieve

the yield target for 3-year AGS. The target will remain in place until progress

is being made towards the goals for full employment and inflation.

     The Bank's daily open market operations are continuing to support credit

and maintain low funding costs in the economy. To assist with the smooth

functioning of Australia's capital markets, the Bank has decided to broaden the

range of eligible collateral for these operations to include Australian dollar

securities issued by non-bank corporations with an investment grade credit

rating. More details are provided in the accompanying market notice.

     The Australian economy is going through a very difficult period and there

is considerable uncertainty about the outlook. Reflecting this uncertainty, the

Board considered a range of scenarios at its meeting. In the baseline scenario,

output falls by around 10 per cent over the first half of 2020 and by around 6

per cent over the year as a whole. This is followed by a bounce-back of 6 per

cent next year.

     There has been a substantial, coordinated and unprecedented fiscal and

monetary response in Australia to the coronavirus. Without this response, the

outlook would have been even more challenging. These policies are supporting the

economy right now and will help when the recovery comes. They are supporting

people's incomes, maintaining the important connections between businesses and

their employees, underpinning the supply of credit to businesses and households,

and keeping borrowing costs low. The deferral of loan and other payments is

helping people manage their cash flows. The Australian banking system, with its

strong buffers of capital and liquidity, is also helping the economy traverse

this difficult period.

     In the baseline scenario considered by the Board, the unemployment rate

peaks at around 10 per cent over coming months and is still above 7 per cent at

the end of next year. A lower unemployment rate than this is possible if the

reduction in labour demand is accompanied by a larger reduction in average hours

worked, rather than by people losing their jobs.

     The Board also considered other scenarios. A stronger economic recovery is

possible if there is further substantial progress in containing the coronavirus

in the near term and there is a faster return to normal economic activity. On

the other hand, if the lifting of restrictions is delayed or the restrictions

need to be reimposed or household and business confidence remains low, the

outcomes would be even more challenging than those in the baseline scenario.

These scenarios will be discussed in the Statement on Monetary Policy, to be

released later this week.

     In the various scenarios considered by the Board, inflation remains below 2

per cent over the next few years. In the March quarter just passed, CPI

inflation rose to 2.2 per cent, but it is expected to turn negative temporarily

in the June quarter, due to falls in oil prices, the introduction of free child

care and deferrals of various price increases. Further out, in the baseline

scenario inflation is 1 to 1.5 per cent in 2021 and gradually picks up further

from there.

     Given this outlook, the Bank will maintain its efforts to keep funding

costs low in Australia and credit available to households and businesses. The

Board is committed to do what it can to support jobs, incomes and businesses

during this difficult period and to make sure that Australia is well placed for

the expected recovery. The Board will not increase the cash rate target until

progress is being made towards full employment and it is confident that

inflation will be sustainably within the 2-3 per cent target band.

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

[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]