The Reserve Bank Governor Confirmed his Commitment to the 0.25% target for the cash rate and the three year bond rate. The Bank has successfully restored stability to the financial system but major challenges lie ahead.

The Reserve Bank Board confirmed its commitment to holding the target cash rate and the three year bond rate at 0.25%.

The Governor indicated that while financial market volatility had been high there are “some signs that markets are working more effectively than they were a few weeks ago”.

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The Governor emphasised his determination “will do what is necessary “to achieve that three year yield target. As indicated in previous statements the Governor expects the target to remain in place “until progress is being made towards goals of full employment and inflation”.

The intensity of the Bank’s policies to target the bond rate and boost liquidity are expected to ease in the near term. Smaller and less frequent purchases of government bonds are anticipated and daily open market operations are likely to be smaller scale.

The Governor has been quite guarded around the economic outlook. He simply notes that “a very large economic contraction is expected in the June quarter and the unemployment rate is expected to increase to its highest level for many years.”

Comment

We should all congratulate the Board for its effectiveness in boosting liquidity and reducing the funding costs of the entire banking system thereby lowering private sector borrowing rates. Restoring stability to the Australian bond market has also assisted in that objective.

The Governor’s Statement indicates that he assesses that his policies have been successful and we can only endorse that assessment.

He points out that this objective has been achieved by purchasing $36 billion of government and semi government bonds. However it seems a little premature to be anticipating a return to stability. Westpac released a forecast last week estimating that, in the wake of the Government’s JobKeeper Payment package ; the expected sharp increase in the cyclical deficit; and earlier stimulus policies the Australian government is expected to need to issue around $300 billion in new government bonds over 2020 and 2021. Absorbing that level of issuance; attracting international and domestic investors is going to pose a considerable challenge for the authorities and the Reserve Bank is likely to need to be actively engaged.

It is somewhat disappointing that the Bank has not provided more guidance on its outlook for economic growth and unemployment.

In the same note described above Westpac also released its forecasts for the unemployment rate and GDP. We expect that the Australian economy will contract by 8.5% in the June quarter with the unemployment rate peaking at 9%.Without the JobKeepers Payment the unemployment rate would have reached 17% in the June quarter.

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