RBA Preview - September 2020: Over To You, Fiscal

MNI RBA Preview - September 2020: Over To You, Fiscal

MNI Point of View:

• No changes are expected at the Reserve Bank of Australia's (RBA) August monetary policy decision, with the Bank expected to reaffirm its low for long, with a willingness to do more, if required, style of forward guidance.
• This should be a relatively straight forward meeting, given last month's release of updated economic forecasts from the RBA and (relatively limited) return to the ACGB purchasing stage, as the Bank looks to promote re-convergence to its 3-Year yield target. Deviations from target have been by no means drastic, but the RBA needs to keep an eye on the steepness of the 3-4 Year section of the curve, in order to preserve a state of smooth market functioning.
• Q2 GDP partial data released thus far has pointed to the worst case being averted, but the second wave of local COVID-19 cases, mostly located in the state of Victoria, clouds the short-term outlook and may very well limit the immediate domestic rebound. It should be noted that the new case count in the state has already moderated from the recent highs, with a broader roadmap for the state's move away from lockdown restrictions set to be outlined this weekend, although regional policymakers remain extremely cautious.
• The Bank continues to point the finger at fiscal policy, with Governor Lowe recently doubling down, as he made a formal request for states to commit another A$40bn to major infrastructure projects over a two-year period. While Lowe's focus on fiscal loosening is nothing new, it is fair to say that the magnitude caught most, including the state Premiers, off guard. This gives the Bank some scope to tweak its rhetoric surrounding fiscal policy at this week's decision, but any such alteration would likely fall inline with rhetoric already deployed by the Governor.
• Still, Lowe's move is understandable, with the Bank possessing relatively limited firepower after its March splurge, while the economy faces problems that are perhaps better addressed by fiscal, rather than monetary policy.

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