Reserve Bank unveils its economic scenarios

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). The Bank has decided to broaden the range of eligible collateral for its daily market operations.

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

• Employment has fallen by around 7.5 per cent over the past month or near a million positions

• Tourist arrivals fell by a record 12.5 per cent in February with departures down 2.9 per cent

• Business conditions index fell from +0.2 points to -21.1 points in March

• Preliminary retail trade rose by a record 8.2 per cent in March

• Exports rose 16 per cent in March compared with a year ago with imports rose 10 per cent

• Australian home prices rose 0.3 per cent in April to be up 8.3 per cent on the year

• Consumer prices rose 0.3 per cent in the March quarter to be up 2.2 per cent on the year

• Business credit rose 2.9 per cent in March – the biggest gain in 32 years

• The budget deficit was $14,976 million (0.8 per cent of GDP) in the 12 months to March

• The Australian All Ordinaries sharemarket index rose 9.5 per cent in April – biggest gain in 32 years

• The Aussie dollar generally held US61-66 cents

• The International Monetary Fund (IMF) expects the global economy to contract by 3 per cent in 2020 before rebounding by 5.8 per cent in 2021

The assessment

• The Reserve Bank is inherently optimistic. And that rings true in the statement. The Bank highlights “substantial, coordinated and unprecedented fiscal and monetary response in Australia to the coronavirus”. And further it stresses that it “will do whatever is necessary” to reboot the economy. The Bank outlined some economic scenarios and the baseline scenario involves the jobless rate rising to 10 per cent and the economy contracting by around 10 per cent. The V-shaped recovery outlined will be fleshed out in the Statement on Monetary Policy.

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?

• The Federal, State and Territory governments continue to announce support and stimulus measures. The Reserve Bank has vowed to do “whatever is necessary” to support the economy. In its determination to narrow bond spreads, the Board announced that it will broaden the range of eligible collateral for its operations to include Aussie dollar securities issued by non-bank corporations with an investment grade credit rating. “Broadening Eligibility of Corporate Debt Securities as Collateral for Domestic Market Operations”

• Now the focus is on the reboot. In simple terms the earlier that Australians can safely exit lockdown, the less damage will be wrought on the economy.

The Statement

• Below is the statement from today’s May 5, 2020 meeting. Emphasis has been added to highlight the key points in the wording in the statement.

Published by Craig James, Chief Economist, CommSec