The RBA Holds Policy Unchanged as Economic Uncertainty Lingers

The Board decided to leave the targets for the cash rate and the yield on 3-year government bonds at 25 basis points. The markets had widely anticipated a hold.

While the markets anticipated a hold, there was interest in the RBA’s view of the latest COVID-19 outbreak in Victoria.

A reintroduction of lockdown measures has, thus far, failed to sink the Aussie Dollar.

In the RBA’s recent statements and minutes, the Board remains reliant upon consumer spending and business investment.

The key question ahead of today’s statement was whether the Board remained as confident over the economic recovery.

Economic data from Australia, China, the Eurozone, and the U.S have continued to reflect improving economic conditions.

This morning, we saw retail sales continue to recover in response to the easing of lockdown measures. Trade data was also positive for the Aussie Dollar. The figures followed on from manufacturing data from Monday.

China reported a surge in new orders from overseas and domestically which also suggests an improvement in trade terms.

The simmering tensions between the U.S and China will remain a concern, near-term, however.

The RBA Rate Statement and the Aussie Dollar

From the RBA Rate Statement this morning, salient points included:

Globally

• Even though the worst of the global economic contraction has passed, the outlook remains highly uncertain.
• The RBA expects the recovery to be only gradual, with its shape dependent on containing COVID-19.
• International trade remains weak, though there has been a strong recovery in industrial activity in China.

Domestically

• The Bank’s mid-March package of support for the Australian economy is working as anticipated.
• Borrowing rates are at historical lows and authorized deposit-taking institutions continue to draw on the Term Funding Facility. Total drawings to date stand at around A$29bn.
• The 3-year AGS yield has crept up above 25 basis points in recent weeks. As a result, the RBA will purchase AGS in the secondary market tomorrow to bring yields back down to target.

Australian Economy

• From the Board’s perspective, the economic downturn is not as severe and the recovery is underway in most of Australia.
• This recovery is likely to be both uneven and bumpy. The COVID-19 outbreak in Victoria is having a major impact on the Victorian economy.
• Given the uncertainties about the overall outlook, the Board considered a range of scenarios at the meeting.
  • Baseline scenario: Output falls by 6% over 2020 and then grows by 5% in 2021. Unemployment projected to rise to around 10% before gradually declining to around 7%.
• The Board will provide the other scenarios in the Statement on Monetary Policy this Friday.
• As the country deals with the coronavirus, the economy remains supported by a substantial, coordinated, and unprecedented easing of fiscal and monetary policy.
• It is likely that fiscal and monetary stimulus will be required for some time to come.
• The Board will not increase the cash rate target until progress is made towards full employment and the Board is confident that inflation will sit substantially within the 2-3% target band.

In response to the hold and comments within the rate statement, the Aussie Dollar rose from $0.71198 to $0.71376.

At the time of writing, the Aussie Dollar was up by 0.13% to $0.71323.

What Lies Ahead?

As outlined by the RBA, the key to the economic recovery remains containment of the coronavirus.

For the markets, the good news is that the number of new cases is beginning to ease back in key economies.

Avoiding further spikes will be important, however, to support the continued economic recovery.

For the Aussie Dollar, consumer confidence and employment conditions will need to continue to improve.

This will make next week’s consumer confidence and employment figures all the more important.

Friday’s Statement of Monetary Policy could be a test for the markets and the Aussie Dollar, however.

While the RBA delivered their base case scenario, there will be plenty of interest in the other scenarios.

The latest COVID-19 outbreak in Victoria and the impact on the Victorian economy raises the possibility of a worse than base case scenario.

For now, however, the good news is that economic indicators are beginning to flash green.

In the wake of last week’s dire 2^nd quarter GDP numbers, the positive stats have delivered welcomed relief.