Australian central bank keeps policy on hold, awaits budget


Key focus: People disembarking from a train at Melbourne’s Flinders Street station. The RBA says labour market conditions have improved and the peak in the jobless rate could be lower than previously expected. — AFP

SDYNEY: Australia’s central bank kept monetary policy unchanged yesterday, clearing the field for the government to unveil a fiscal blueprint designed to drive the economy’s recovery from a Covid-induced recession.

Reserve Bank governor Philip Lowe kept both the key interest rate and three-year yield target unchanged at 0.25%, as expected. The labour market is a key focus for the bank, which is due to release fresh forecasts next month, he said.

“The board views addressing the high rate of unemployment as an important national priority, ” Lowe said in a statement. Policy settings will remain highly accommodative for as long as required and the bank “continues to consider how additional monetary easing could support jobs as the economy opens up further, ” he said.

The RBA has been working in tandem with fiscal policy makers, pushing down the cost of borrowing to smooth the path for major spending programmes. The government’s budget, due five hours after the rate decision, is expected to see a boost to infrastructure, the bringing forward of tax cuts and other measures to kick-start a recovery.

The RBA said labour market conditions have improved and the peak in the jobless rate could be lower than previously expected. Still, unemployment and underemployment were likely to remain high for an extended period.

The Australian dollar initially rose on the statement before falling back to be little changed at 71.94 US cents in Sydney.

Economists expect the budget deficit will swell to A$220bil (US$158bil), or 11.6% of gross domestic product, this fiscal year, and unemployment is forecast to rise to 8% by mid-2021 from the current 6.8%, according to the median estimate of a Bloomberg survey.

“Public sector balance sheets in Australia are in good shape, which allows for continued support, with the Australian Government budget to be announced this evening, ” the RBA said. “Both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment.”

The RBA’s statement “sounded dovish and left the door open for additional stimulus, ” said Marcel Thieliant, senior economist at Capital Economics in Singapore.

“We now expect the bank to cut the cash rate target, the three-year yield target and the interest rate on the term funding facility to 0.1% at its November meeting. We also expect the bank to announce additional purchases of government bonds in order to reduce long-term interest rates.”

Expectations that the RBA would add to stimulus on the same day as the budget increased last month as economists predicted a “Team Australia” initiative of combined fiscal-monetary support. This view was buttressed when deputy governor Guy Debelle delivered a speech that set out potential additional policies. These included:

> Buying bonds further out along the curve, supplementing the three-year yield target.

> Currency intervention, though he noted that “with the Australian dollar broadly aligned with its fundamentals, it is not clear this would be effective in the current circumstances.”

> Lower the current structure of rates in the economy a little more, without going negative, i.e. to 0.10% from 0.25%; and

> Going negative, on which Debelle said the evidence is “mixed”

Yet Debelle also said that the government’s September expansion of its bank-lending program represented “substantial stimulus” and was in some ways similar to a QE programme. The consensus view subsequently shifted to the RBA staying out of the government’s way on budget day to allow it to maximise the impact of its fiscal plan.

“While monetary policy was paused, the RBA board has intensified their focus on the labour market, including making supporting employment a focus for additional policy easing. The economy and labour market have held up better than the RBA had expected, but we anticipate that the November forecast update will highlight that there remains further scope for policy support, ” said economist James McIntyre.

Australia’s recovery looks to regain momentum as the southeastern state of Victoria contains a serious outbreak of Covid that had forced it to impose the strictest lockdown in the country. — Bloomberg

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 1
Cxense type: free
User access status: 3
Join our Telegram channel to get our Evening Alerts and breaking news highlights

Australian central bank , RBA , policy hold , budget ,

   

Next In Business News

Singapore central bank removes caps on dividend payments by local banks
Mercury bags RM450mil construction job in Johor Baru�
Glomac registers RM28.3mil profit in FY21
KLCI ekes out slight gains, Petronas stocks, Tenaga advance
AstraZeneca second dose doesn't raise risk of rare blood clots
Barclays pays out more than US$1bln to investors as profits rebound
LSH Capital posts 1H earnings jump ahead of LEAP listing
China health stocks slammed as investors fear regulators' diagnosis
China sell-off drives Asian equities lower
SMEs' contribution to GDP down 7.3% in 2020

Stories You'll Enjoy


Vouchers