Cash rate stays at record low

RBA optimistic of recovery after sharp contraction

THE Reserve Bank of Australia has kept the cash rate at a record low 0.25 per cent at its monthly board meeting as it assesses the impact of recent measures to stimulate the economy.

The central bank has also forecast a sharp contraction of the economy in 2020 after social restrictions and business closures forced by the coronavirus pandemic but held out hope of a recovery next year.

Economists had widely expected the RBA to hold the benchmark rate at the current level but described the central bank’s economic forecast as “optimistic”.

Governor Philip Lowe yesterday said the board had decided to maintain the current policy settings, including the targets for the cash rate and the 25-basis point yield on three-year Australian government bonds.

The central bank had announced two rate cuts as well as quantitative easing measures in March in an effort to cushion the economic impact of the coronavirus crisis.

This has been followed by a record $320 billion spending by the Federal Government on stimulus measures to combat COVID-19. Bond purchases by the central bank have so far totalled about $50 billion and while this had been scaled back for now, Mr Lowe said the RBA was prepared to scale up purchases again and “do whatever was necessary” to ensure bond markets remained functional and three-year AGS yields stayed at 25 basis points.

Mr Lowe reiterated the RBA would not increase the cash rate until progress was made towards full employment and it was confident that inflation would be sustained within the 2.0 per cent to 3.0 per cent target band.Given the considerable uncertainty over the Australian economy, the RBA board has considered a range of scenarios.

Under its baseline or most likely scenario, economic output would fall by 10 per cent during the first half of 2020 and about 6.0 per cent over the full year. This will be followed by a bounce-back of 6.0 per cent next year.

Under this scenario, the central bank expects the unemployment rate to peak at about 10 per cent in coming months but this will stay above 7.0 per cent even at the end of next year.

“A stronger economic recovery is possible if there is further substantial progress in containing the coronavirus in the near term and there is a faster return to normal economic activity,” Mr Lowe said.

Analysts considered the forecast almost upbeat.

“The baseline scenario strikes me as relatively benign outcome compared to some of the more dire scenarios contemplating declines and recovery trajectories comparable to the Great Depression,” fund manager GSFM’s adviser Stephen Miller said.