Sat, Oct 16, 2021 @ 12:40 GMT
HomeAction InsightCentral Bank ViewsRBA Forecasts Double-Digit Contraction and Unemployment in First Half of the Year

RBA Forecasts Double-Digit Contraction and Unemployment in First Half of the Year

As revealed in the latest Statement of Monetary Policy (SMP), RBA sharply cut economic forecasts for this year. GDP is projected to record double-digit contraction in the first half of the year before recovery in 2021. The unemployment rate could peak at 10%, while inflation could fall the negative territory, this quarter. Policymakers did not signal the likelihood of further easing measures. We expect the cash rate will stay at the current level – lower bound of policy rate (0.25%) – for years. Meanwhile, fiscal measures could take the driver’s seat for boosting economic growth in the future.

GDP is estimated to contract -10% q/q in 1H20, resulting from a -15% slump in household spending. Full year 2020 contraction will be around -5%, followed by a rebound of +4% growth in the next year. On the job market, the unemployment rate is expected to jump to a peak of 10% in 2Q20. As the economy improves, this will then decline to about 6.5% in late 2021, suggesting that it will be a long way for achieving the 4.5% long-term target. On inflation, headline CPI is projected to contract -1% before returning to positive by end -2020. Inflation could reach +1.5% next year, suggesting that it will stay far below the +2% target.

On the monetary policy outlook, RBA noted that it will remain accommodative for years to come. As indicated in the statement, “in the context of these extraordinary times and consistent with its broad mandate to promote the economic welfare of the people of Australia, the Reserve Bank will continue to play its role in building the bridge to the time when the recovery takes place”. The members pledged to “maintain its efforts to keep funding costs low in Australia and credit available to households and businesses” and “not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3% target band”. Meanwhile, RBA has injected AUD$50Bn of additional liquidity through repos since the beginning of April. It has also increased the average residual maturity of the repo book to 70 days, from around 1 month previously. However, RBA noted that it has slowed the pace of daily market operations in recent weeks, despite the pledge to scale up purchases again “if necessary”.

Concerning QE, the central bank suggested that it has purchased around AUD50B of government and semi government securities, adding that “auctions have been well subscribed, with most bonds having been bought at a higher yield (lower price) compared with prevailing mid-market yields (prices)”.

Featured Analysis

Learn Forex Trading