RBA wades back into the bond market as Victorian economy clouds the outlook

Australia’s Reserve Bank today confirmed it would hold benchmark interest rates unchanged, and maintain its 0.25 per cent target on the three-year bond yield.

All in all, no major surprises in what was a closely-watched monthly announcement, after the COVID-19 outbreak in Victoria raised some mild speculation about further support measures.

However, RBA governor Philip Lowe did add that the yield on the RBA’s target three-year bond had “been a little higher than 25 basis points over recent weeks”.

So as of tomorrow, the bank will recommence buying Australian government securities (treasury bonds) to “ensure that the yield on three-year bonds remains consistent with the target”.

Stocks continued their strong session following the announcement, as the ASX200 climbed to an intra-day gain of more than 2 per cent.

 

Victoria’s lockdown will impact recovery

While highlighting that Australia’s economy has faced its sharpest contraction since the 1930s, the RBA noted that a “recovery is now underway in most of Australia”.

But it pointed to the enforced shutdown in Victoria as evidence that any recovery would inevitably be “uneven and bumpy”.

As a result, the RBA said “further job losses in Victoria” meant its baseline forecast was for the national unemployment rate to now rise above 10 per cent later this year, with a commensurate 6 per cent slump in economic growth.

“Over the following couple of years, the unemployment rate is expected to decline gradually to around 7 per cent,” the RBA said.

 

Economic outlook

In the wake of such a significant fall, the RBA said it still expected GDP growth to bounce back to around 5 per cent in 2021.

And having repeatedly made calls for fiscal policy to help shoulder the burden of propping up the economy, Lowe also welcomed the government’s recent extension of JobKeeper and JobSeeker support measures for a further six months to March 2021.

“It is likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market,” Lowe said.

And as for the mysterious forces that may give rise to a long-awaited uplift in inflation, the RBA doesn’t expect them to arise anytime soon.

Coming off a deflationary quarter in Q2, Lowe said CPI growth should return to positive territory in the September quarter. However, he doesn’t think the bank’s mandated inflation target range of 2-3 per cent is under threat.

“Given the ongoing spare capacity in the economy, inflation is expected to average between 1 and 1.5 per cent over the next couple of years,” Lowe said.

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