The minutes for RBA’s July meeting affirmed that policymakers should leave the current monetary measures steady for a prolonged period of time. Policymakers at the July meeting did not discuss about the surge in new coronavirus cases in Melbourne and potential economic impacts of the renewed lockdown measures. We expect risks to economic growth is skewed to the downside.

The meeting affirmed the policy package announced in March, which includes a target for the cash rate of 0.25%; a target of 0.25% for the yield on 3-year Australian Government bonds; the Term Funding Facility to support credit to businesses, particularly small and medium-sized businesses; and an interest rate of 10 bps on Exchange Settlement balances held by financial institutions at RBA. While the policy rate has been staying at record low, policymakers judged that negative interest rates remain “extraordinarily unlikely”. As noted in the minutes, yield curve targeting of 3-year government bonds will continue “until progress is made towards the Bank’s goals of full employment and the inflation target”. The minutes reaffirmed that such target would be removed before increase in the policy rate. The members admitted that government bonds have not been purchased for some time. Yet, they pledged to scale up the purchases again, if necessary.

On economic developments, the members agreed that economic conditions have stabilised and the contraction has been less severe than earlier expected. They, however, emphasized that the future path of the economy remains highly uncertain. Particularly, health situation was continuing to affect the consumption and investment plans. Released a week after the RBA meeting, the employment report revealed that the number of payrolls increased +210.8K in June, after declining -227.7K in May. This had beat consensus of a +112.5K addition. The unemployment rate increased +0.3 percentage points to 7.4%. The increase was likely driven by higher participation rate which improved to 64% from 62.9 in May. While official inflation data is released once a quarter, the Melbourne Institute inflation gauge has provided a good reference on monthly inflation. Headline CPI in June improved to +0.7% y/y, from +0.07% in May. Yet, this has remained far below RBA’s 2% target. We believe it is a long way for both the employment situation and inflation to return RBA’s satisfactory levels. As such, both monetary and fiscal measures would have to stay expansionary for an extended period of time.

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Victorian premier, Daniel Andrews, reintroduced lockdown measures across all of metropolitan Melbourne for at least 6 weeks from July 7. Residents are allowed to leave home only for the following reasons: shopping for food and supplies; care and caregiving; exercise and outdoor recreation; study and work. Meanwhile, a number of businesses and facilities in metropolitan Melbourne and Mitchell Shire will be required to close, including beauty and personal care services, cultural and entertainment venues and community facilities. Cafes and restaurants will return to takeaway and delivery only. The outbreak has shown no signs of stabilizing since implementation of the measures. It is possible that the lockdown will be extended after 6 weeks. We expect RBA members would have to discuss the potential economic impacts at the August meeting.

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