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Australia Monetary Policy August 2020

Australia: RBA keeps rates at all-time low in August; announces further purchases of government bonds

At its monetary policy meeting on 4 August, the Reserve Bank of Australia (RBA) decided to keep the cash rate unchanged at an all-time low of 0.25%. Moreover, the Bank reaffirmed that it will keep the target for three-year government bond yields at 0.25% and announced that, in order to achieve this goal, it will purchase additional government securities on the secondary market.

The pandemic and associated lockdown measures have wreaked havoc on the economy and the labor market in the first half of the year, and have driven the RBA’s accommodative stance. However, recent data suggests the economy bottomed out in Q2 and that the recovery could be gathering some momentum on the back of supportive fiscal and monetary measures. Meanwhile, prices pressures remain muted and consumer prices dropped on an annual basis in Q2 on lower oil prices and due to the government’s decision to make childcare free from early April to late June. The functioning of government bond markets has stabilized following the Bank’s interventions between March and May, although some pick-up in bond yields in recent weeks prompted the Bank to announce it will resume interventions in the secondary markets to keep yields tightly anchored to the 0.25% target and provide liquidity to markets.

Looking forward, the Bank reaffirmed its commitment to maintain the cash rate at its current all-time low until the labor market returns towards full employment and inflation rises sustainably within the 2.0%–3.0% target range. The outlook remains highly uncertain, however, as consumers’ and investors’ spending decisions will be affected by the effectiveness of containment measures both domestically and globally. In this respect, the recent lockdown of Victoria following a surge in new coronavirus cases poses further downside risks if it is prolonged. That said, the RBA reiterated that the downturn has been less severe than expected, thanks to a faster-than-expected easing of restrictions on economic activity and the joint policy efforts of the government and the RBA.

Commenting on the meeting, Andrew Ticehurst, research analyst at Nomura, stated:

“The 0.25% cash rate and YCC target were unchanged, as was all forward guidance. We expect these targets to remain in place through at least 2020 and 2021. We believe the probability of further RBA easing is low, but think that if policy is to change this year, some form of further easing is more likely than any tightening.”

The next monetary policy meeting is scheduled for 1 September.

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