Reserve Bank reviews the impact from Victoria
Reserve Bank Board minutes

Reserve Bank Board minutes: The Reserve Bank Board has assessed that Federal government fiscal policy measures would provide a net 4 per cent boost to the economy in 2019/20 and 5 per cent boost in 2020/21.

The Reserve Bank Board minutes are important in gauging policy settings.

What does it all mean?

• Victoria dominated discussion of economic forecasts at the last Reserve Bank Board meeting: “Members agreed that the lengthening and tightening of restrictions in Melbourne, and the extension of restrictions to regional Victoria, was a setback to the recovery and would weigh on overall domestic activity in the September quarter.”

• Despite the setback, the RBA Board didn’t consider that further measures were deemed necessary.

• It’s worth noting that the Reserve Bank Governor elaborated on the economic state of play last Friday.

What do the reports and figures show?

Minutes of the Reserve Bank Board meeting held on August 4

• The Decision: “The Board reaffirmed the elements of the policy package announced on 19 March 2020, namely:

a target for the cash rate of 0.25 per cent

a target of 0.25 per cent for the yield on 3-year Australian Government bonds

the Term Funding Facility to support credit to businesses, particularly small and medium-sized businesses

an interest rate of 10 basis points on Exchange Settlement balances held by financial institutions at the Bank.”

• The Board affirmed that the yield target for 3-year bonds would be maintained until progress is made towards the Bank’s goals of full employment and the inflation target, and that it would be appropriate to remove the yield target before the cash rate itself is raised. The Board determined that it would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band.”

• Policy package: “Members reaffirmed that there was no need to adjust the package of measures in Australia in the current environment. Members agreed, however, to continue to assess the evolving situation in Australia and did not rule out adjusting the current package if circumstances warranted.”

• “Members agreed that the Bank’s policy package was continuing to work broadly as expected.”

• Domestic economy assessment: “The Australian economy was going through a very difficult period and was experiencing the biggest shock to economic activity since the 1930s. A very large number of people had lost their jobs, with many others retaining their jobs over this period only because of government support programs. Nevertheless, members noted that the downturn had not been as severe as earlier expected and a recovery was under way in most of Australia. The recovery was, however, likely to be slower than earlier expected, with the COVID-19 outbreak in Victoria having a major impact on the economy. Uncertainty about the health situation and the future path of the economy was continuing to affect the spending plans of many households and businesses.”

• Job market support: “They (the Board) welcomed the Australian Government’s recent announcement that various income support measures would be extended, and considered it likely that fiscal and monetary support would be required for some time given the outlook for the economy and the labour market.”

• Small business lending: “lending to small and medium-sized enterprises (SMEs), many of which were operating in the most affected sectors of the economy, had been little changed. Demand for new loans – especially from SMEs – had been low, reflecting the weak economic conditions and the unusually uncertain outlook, although the supply of credit also appeared to have tightened a little. Members noted the importance of the JobKeeper program and other policy interventions for supporting SMEs through the current difficult period.”

• Fiscal policy impact: “In considering the substantial amount of fiscal policy support, members noted that around 30 per cent of Australia’s working-age population was receiving JobKeeper, JobSeeker or an equivalent payment. The JobKeeper program had been extended to March 2021, with tighter eligibility requirements and lower, tiered payments for full-time and part-time workers. The Coronavirus Supplement, paid to JobSeeker recipients, had also been extended at a lower rate from September. Combined with other measures and the usual automatic stabilisers, the net positive fiscal impact from the expected change in Australian Government finances was equivalent to around 4 per cent of GDP in 2019/20 and a further 5 per cent in 2020/21. State governments had also provided some support, mostly in the form of increased funding for public services and relief from taxes and fees.”

• Board members also assessed: economic forecasts in the three scenarios; the housing market; currency movements; impact of Victorian restrictions; household spending; and international developments.

What is the importance of the economic data?

• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for investors?

• The Reserve Bank Board is ready to act if required and provide more support for the economic recovery. But monetary policy options are clearly more limited.

• The Reserve Bank Governor confirmed last week that interest rates will stay unchanged at historic lows for at least three years.

Craig James, Chief  Economist, CommSec