Reserve Bank tinkers with forecasts

Reserve Bank Board meeting

The Reserve Bank has maintained its targets for the cash rate and 3-year government bond yield at 0.25 per cent (quarter of a per cent or 25 basis points).

What has changed since the last Board meeting on July 7?

Victoria entered stage 4 lockdown restrictions.

The Federal Government delivered an economic and budget update.

The federal budget was $85.8 billion in deficit (4.3 per cent of GDP) over the past year (2019/20). The Government forecasts a $184.5 billion deficit (9.7 per cent of GDP) in the current year. The expected 2020/21 deficit would be the highest (as a share of GDP) in 75 years – since 1946.

Employment rose by a record 210,800 in June after falling by 264,100 in May

The unemployment rate rose from 7.1 per cent to a 21½-year high of 7.4 per cent in June.

The Consumer Price Index – the main measure of inflation in Australia – fell by 1.9 per cent in the June quarter. It was the biggest ever quarterly fall for the CPI (since 1948). The last time consumer prices fell as much (C series index) was in September quarter 1931.

The trimmed mean measure of consumer prices fell by 0.1 per cent in the June quarter (1.2 per cent annual).

Aussie home prices fell by 0.6 per cent in July to be 7.1 per cent higher over the year.

Private sector credit fell by 0.2 per cent in June – the biggest fall in 27½ years.

Manufacturing activity has expanded for two successive months for the first time since October 2019.

The JobKeeper and JobSeeker wage subsidy programmes were modified and extended.

ANZ job ads rose 16.7 per cent in July but were still down 34 per cent on the year.

The NAB business confidence index improved from -20.3 points to +1.5 points in June (The long-term average is +5.2 points).

The NAB business conditions index improved from -24.1 points to -7.5 points in June. (The long-term average is +5.3 points).

Retail trade rose by 2.7 per cent in July to stand 8.5 per cent higher than a year ago.

The US economy (GDP) shrank at an annualised rate of 32.9 per cent in the June quarter – the biggest contraction in economic activity since the March quarter 1946.

The Chinese economy expanded by 11.5 per cent in the June quarter after a 10 per cent contraction in the March quarter.

The Aussie dollar lifted above US72 cents and is now near US71.25 cents.
The assessment

· The Reserve Bank Board signed off on the latest forecasts at today’s meeting. Full details will be released on Friday.

· But the key takeaway is that the Reserve Bank now thinks the economy will contract 6 per cent this year (previously tipped -5 per cent) before rebounding 5 per cent in 2021 (previously tipped +0.4 per cent). So, still a ‘V-shaped’ recovery is tipped.

· The other key takeaway is that the Reserve Bank thinks the 3-year bond yield (0.26 per cent) is a couple of basis points too high. So it will make bond purchases tomorrow in an attempt to drive yields lower.
Perspectives on interest rates

· The Reserve Bank has left the cash rate at a record low of 0.25 per cent after previously cutting rates on March 3 and March 19, 2020, each by 25 basis points. There have been 17 rate cuts since November 2011 with the cash rate cut from 4.75 per cent. Previously rates rose seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.
What are the implications of today’s decision?

· Interest rates will remain at record low levels until at least 2022. While further monetary stimulus is possible, the onus now lies on federal, state and territory governments to provide targeted stimulus. With the actual cash rate traded in the market around 0.13-0.14 per cent currently, another interest rate cut appears unlikely, given policymaker’s views on negative interest rates.

· Focus now shifts to the releases of the Statement on Monetary Policy on Friday.
The Statement

· Below is the statement from today’s August 4, 2020 meeting. The key points are highlighted below.

Published by Craig James, Chief  Economist, CommSec