The RBA Cuts the Cash Rate and Delivers More to Support Inflation and Employment

As the world readies for the election of the 46^th U.S President, the RBA delivered its November policy decision this morning.

In line with market expectations, the RBA reduced its cash target rate from 0.25% to 0.10%.

Additionally, the RBA:

• Reduced the target rate for the yield on 3-year Australian Government Bonds to around 0.10%.
• Reduced the interest rate on new drawings under the Term Funding Facility to 0.1%.
• Cut the interest rate on Exchange Settlement balances to zero.
• Will purchase A$100bn of government bonds of maturities of around 5 to 10 years over the next 6-months.

Under the program to purchase longer-dated bonds, the RBA will buy bonds issued by the Australian government and by states and territories. These are expected to be purchased in an 80/20/ split. The first purchase is set to take place in the secondary market on Thursday.

The Statement

Salient points from the RBA Rate Statement included:

• The bank remains prepared to purchase bonds in whatever quantity to achieve the 3% target yield. Any purchases to support the target would be in addition to the A$100bn bond purchase program.

Economic Outlook:

• The global economy has been recovering from the initial virus outbreaks, with China’s economic recovery the most advanced.
• Output in most countries remains well short of pre-pandemic levels, however. Additionally, recent virus outbreaks pose a downside risk to the outlook, particularly in Europe.
• In Australia, the RBA expects the economy to return to growth in the 3^rd It will take some time to reach the pre-pandemic level of output, however.
• The RBA central scenario is for growth of around 6% of the year to June 2021 and 4% in 2022.
• Regarding inflation, the RBA forecasts inflation of 1% in 2021 and 1.5% in 2022.
• The Board expects unemployment to remain high, but to peak at a little below 8%.
• At the end of 2022, the RBA forecasts the employment rate to be around 6%.
• The RBA’s monetary policy response complements the significant steps taken by the Australian government.
• In response to the RBA’s easing:
  • Borrowers will see lower financing costs.
  • A lower exchange rate than otherwise.
  • Asset price and balance sheet support.
  • Low funding costs and support of the supply of credit to the economy.
• The Board will not increase the cash rate until actual inflation is sustainably within the 2-3% target range. Given the outlook, the Board is not expecting to increase the cash rate for at least 3-years.
• Additionally, the Board will keep the size of the bond purchase program under review. The RBA is also prepared to do more.

The Aussie Dollar

In response to the RBA monetary policy decision, the Aussie Dollar fell from a morning high $0.7063 to a low $0.70359.

At the time of writing, the Aussie Dollar was down by 0.18% to $0.70403. The focus now shifts to the U.S Presidential Election.