RBA: cash rate remains unchanged 6 months on from historic cut

Six months on from the historic emergency rate cut to 0.25% in March, the Reserve Bank of Australia (RBA) has elected to once again leave the cash rate unchanged.

The decision was made at the RBA’s regular monetary policy meeting, which happens on the first Tuesday of every month. As it stands, members do not anticipate a cash rate change for at least three years, a point RBA Governor Philip Lowe affirmed while appearing before the House of Representatives Standing Committee on Economics in August.

“The Board has clearly indicated that it will not increase the cash rate until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target range,” Dr Lowe told the committee.

“Given the outlook I discussed earlier, these conditions are not likely to be met for at least three years. So, it is highly likely that the cash rate will be at this level for some years and having a target for three-year yields of 25 basis points reinforces this message.”

Is the RBA COVID-19 recovery plan working?

When addressing the lower house in August, Dr Lowe maintained that that the RBA’s current monetary policy measures are the best course of action, although it reserves the right to adjust as needed.

According to Dr Lowe, RBA pandemic policy measures coupled with Australia’s strong financial position coming into the crisis have been a recipe for success.

“The mid-March package is providing material help now and it will continue to do so. Interest rates are lower than they have ever been before and the financial system is flush with liquidity,” he said.

“… We went into the pandemic with strong balance sheets and high levels of capital in the Australian banking system. This means that our financial institutions are well placed to provide the credit that the economy will need.”

Despite monetary policy being on track, Dr Lowe said that it was fiscal policy that had provided “much of the support” to the economy so far.

“This is quite a change from how things have worked over recent decades and it is being accompanied by a significant increase in public borrowing as governments work to limit the hit to people’s incomes,” he said.

Labour market update

July labour force data from the Australian Bureau of Statistics (ABS) showed an increase in both employment and unemployment.

Seasonally adjusted employment increased by 114,700 people between June and July and hours worked increased 1.3%.

Unemployment increased 0.1pts to 7.5%, equating to a rise of almost 16,000 people.

“For the first time there were more than one million people out of work, available to work and actively looking for work”, said head of Labour Statistics at the ABS Bjorn Jarvis.

Mr Jarvis also noted the July data did not consider the impact of Stage 4 restrictions, which would begin to be seen next month.

“The July data provides insight into the Australian labour market during Stage 3 restrictions in Victoria. The August Labour Force data will provide the first indication of the impact of Stage 4 restrictions.” Mr Jarvis said.

The RBA predicts unemployment to reach 10% later this year.

Changes since March

Due to Australia’s initial success in containing the virus, the RBA says the economic hit has not been has large as first thought, although it warns it could be a bumpy road ahead as the outlook remains uncertain.

Earlier this year, the Australian economy was predicted to experience a contraction in GDP of around 10% over the first half of 2020.

Now, the RBA is still forecasting the biggest economic contraction in decades but says it is likely to be around 7%, depending on data for the June quarter which is due to be released this week.

“The downturn in the first half of the year had been smaller than predicted a few months earlier because restrictions had been less onerous and had been lifted earlier than expected,” the RBA August minutes said.

“This had allowed an economic recovery to commence in May. Unprecedented fiscal and monetary support had also played a key role.”

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