Central bank optimistic amid COVID relief packages

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June 17 2020
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A better than expected outcome on the health front could see a shallower than expected economic impact, with governments easing lockdown measures earlier than anticipated, the Reserve Bank has noted.

The Reserve Bank of Australia (RBA) has released minutes from its monetary policy board meeting earlier this month, at which it unsurprisingly held the official cash rate at the “lower bound” of 0.25 per cent.

The central bank acknowledged the severity of the challenges facing the Australian economy, which it said has slipped into the deepest downturn in almost 90 years.

“Members recognised that the Australian economy was experiencing the biggest economic contraction since the 1930s,” the RBA stated.

“A very large number of people had lost their jobs or were working zero hours, household spending had weakened considerably, and some investment was being deferred or had been cancelled.”

But, according to the central bank, the light at the end of the tunnel may be closer than initially anticipated.

“Notwithstanding these developments, it was possible that the downturn would be shallower than earlier expected,” the RBA added.

“The rate of new infections had declined significantly, and some restrictions had been eased earlier than had previously been thought likely.”

Despite the renewed optimism, the RBA warned that the outlook remained “highly uncertain”, with the pandemic likely to have “long-lasting effects on the economy”.

According to the central bank, its monetary policy strategy, which also included a quantitative easing program and a $90-billion term funding facility, helped stabilise the financial system through the hardship.

“Members agreed that the bank’s policy package was working broadly as expected. The package had helped to lower funding costs and stabilise financial conditions, and was supporting the economy,” the central bank said.

“The package had also contributed to a significant improvement in the functioning of government bond markets, and the yield on three-year Australian government bonds was at the target of around 25 basis points.

“Given these developments, the bank had purchased government bonds on only one occasion since the previous meeting, although it was prepared to scale up these purchases again, if necessary, to achieve the yield target and ensure bond markets remain functional.”

The board reiterated that the 0.25 per cent target rate would remain in place “until progress was made towards the goals for full employment and inflation”.

The central bank concluded by lauding the “substantial, coordinated and unprecedented” level of fiscal and monetary policy stimulus.

“It was likely that this fiscal and monetary support would be required for some time,” the central bank stated.

“The board remained committed to supporting jobs, incomes and businesses and to making sure that Australia is well placed for recovery.

“Its actions were keeping funding costs low and supporting the supply of credit to households and businesses. This accommodative approach would be maintained as long as required,” the RBA concluded.

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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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