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Australia Monetary Policy May 2020

Australia: RBA keeps rates at all-time low in May; strengthens quantitative easing measures

At a monetary policy meeting held on 5 May, the Reserve Bank of Australia (RBA) decided to keep the cash rate unchanged at an all-time low of 0.25%. Moreover, it broadened the range of eligible assets for its daily open market operations and reaffirmed it will keep its three-year government bond yields at the 0.25% target it set at an extraordinary policy meeting held on 19 March, in a bid to stabilize the functioning of financial markets.

The economy is set to be hammered in the short- to medium-term, despite policy measures announced in several countries, and plunging activity coupled with falling oil prices is poised to suppress inflation in Q2, after spiking in the first quarter. That said, following a period of notable financial turmoil, the functioning of government bond markets has improved substantially thanks to the Bank’s interventions, which has so far bought around AUD 50 billion of government bonds in secondary markets. This has allowed the lender to scale back the size and frequency of bond purchases, although the Bank stands ready to scale them back up if needed. The Central Bank also announced it broadened the range of eligible collateral for daily open market operations to support credit and keep funding costs low. For this purpose, it will start accepting local currency securities issued by non-bank corporations with an investment grade credit rating.

Looking forward, the Bank announced it will maintain rates at their current all-time low levels until the labor market reaches full employment and inflation rises sustainably within the 2.0%–3.0% target range. The outlook is mired by elevated uncertainly, as much will depend on the spread of the virus and the duration and severity of the containment measures both domestically and globally. Unemployment is set to jump in the near-term, while inflation is expected to remain below the 2.0% over the next few years, coming in around 1.0%–1.3% in 2021 and picking up afterwards.

The next monetary policy meeting is scheduled for 2 June.

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