Reserve Bank goes 'all in' - CommSec
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Economics | November 3, 2020 Reserve Bank goes ‘all in’ Reserve Bank Board meeting Interest rates: The Reserve Bank (RBA) has cut its target rates for the cash rate and 3-year government bond yield from 0.25 per cent (quarter of a per cent or 25 basis points) to 0.10 per cent. Further measures: A reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent; a reduction in the interest rate on Exchange Settlement balances to zero; the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months. Commitment: “The Board is not expecting to increase the cash rate for at least three years.” What has changed since the last Board meeting on October 6? Employment fell by 29,500 in September after rising by an upwardly-revised 129,100 jobs in August (previously reported as an 111,000 increase). The unemployment rate rose from 6.8 per cent to 6.9 per cent. The International Monetary Fund expects the global economy to contract by 4.4 per cent in 2020 before rebounding by 5.2 per cent in 2021. The Australian economy is tipped to contract by 4.2 per cent in 2020 before expanding 3 per cent in 2021. The Westpac-Melbourne Institute Index of Consumer Confidence rose by 11.9 per cent in October, lifting from 93.8 in September to a 27-month high of 105 points. The Chinese economy (GDP) grew at a 4.9 per cent annual rate in the year to September, up from a 3.2 per cent annual growth rate in June. ‘Preliminary’ retail trade fell by 1.5 per cent in September after falling 4.0 per cent in August. Retail spending is still up 5.2 per cent on the year. The Consumer Price Index (CPI) rose by 1.6 per cent in the September quarter. In the year to September, the CPI rose by 0.7 per cent after falling 0.3 per cent in the year to June. The underlying (trimmed mean) measure rose 0.4 per cent in the September quarter (1.2 per cent annual). The CoreLogic Home Value Index of national home prices rose 0.4 per cent in October – the first monthly Craig James, Chief Economist Twitter: @CommSec IMPORTANT INFORMATION AND DISCLAIMER FOR RETAIL CLIENTS The Economic Insights Series provides general market-related commentary on Australian macroeconomic themes that have been selected for coverage by the Commonwealth Securities Limited (CommSec) Chief Economist. Economic Insights are not intended to be investment research reports. This report has been prepared without taking into account your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any securities or financial instruments, or as a recommendation and/or investment advice. Before acting on the information in this report, you should consider the appropriateness and suitability of the information, having regard to your own objectives, financial situation and needs and, if necessary, seek appropriate professional of financial advice. CommSec believes that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made based on information available at the time of its compilation, but no representation or warranty is made as to the accuracy, reliability or completeness of any statements made in this report. Any opinions, conclusions or recommendations set forth in this report are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed by any other member of the Commonwealth Bank of Australia group of companies. CommSec is under no obligation to, and does not, update or keep current the information contained in this report. Neither Commonwealth Bank of Australia nor any of its affiliates or subsidiaries accepts liability for loss or damage arising out of the use of all or any part of this report. All material presented in this report, unless specifically indicated otherwise, is under copyright of CommSec. This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399, a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. This report is not directed to, nor intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or that would subject any entity within the Commonwealth Bank group of companies to any registration or licensing requirement within such jurisdiction.
Economic Insights. Reserve Bank goes ‘all in’
increase since April. Prices were up 3.9 per cent over the year.
The AiGroup Performance of Manufacturing Index rose from 46.7 in September to a 2-year high of 56.3 in
October.
ANZ job advertisements rose by 9.4 per cent in October to 129,544 available positions. Ads have lifted for six
successive months
Council approvals to build new homes rose by 15.4 per cent – the biggest rise in seven months.
The value of new loan commitments for housing rose by 5.9 per cent in September.
The Aussie dollar continues to hold US70-72 cents.
The assessment
In poker terms, the Reserve Bank Board has gone ‘all in’. Monetary stimulus is now at the maximum setting with
the RBA hoping that the new measures will provide fresh momentum to the fledgling economic recovery – with the
country now completely free of virus lockdowns. Policy actions have been designed to keep borrowing costs for
Aussie consumers and businesses anchored at very low levels to encourage spending, investment and job hiring.
Encouragingly, the Reserve Bank now expects the jobless rate “to peak a little below 8 per cent.”
Perspectives on interest rates
The Reserve Bank has cut the cash rate from 0.25 per cent to 0.10 per cent after previously cutting rates on
March 3 and March 19, 2020, each by 25 basis points. The target rate for 3-year bond yields has been cut from
0.25 per cent to 0.10 per cent after the RBA previously implemented the 3-year bond target rate on March 19,
2020. There have now been 18 cash 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 Reserve Bank would never admit that there are no options left. In fact the statement noted “The Board is
prepared to do more if necessary.” But monetary policy – if it’s not there already – must be very close to the
maximum stimulatory setting. Arguably both fiscal and monetary policy settings are the most stimulatory they
have ever been. A lower Australian dollar could certainly assist exporters but that is a question for the financial
markets. The RBA would probably conclude that the Aussie dollar is at an appropriate level given economic and
commodity ‘fundamentals’.
Future decisions by the Reserve Bank and state, territory and federal governments will depend on: continued
success in ‘flattening the curve’; virus treatments and vaccines; progress of the job market; and progress of
consumer confidence and spending.
November 3, 2020 2
Economic Insights. Reserve Bank goes ‘all in’
The Statement
Below is the statement from today’s November 3, 2020 meeting. The key points are highlighted.
Media Release
No: 2020-28
Date: 3 November 2020
Statement by Philip Lowe, Governor:
Monetary Policy Decision
At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy
from the pandemic. With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the
creation of jobs. Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was
three months ago. Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment
of the virus.
The elements of today's package are as follows:
a reduction in the cash rate target to 0.1 per cent
a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent
a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent
a reduction in the interest rate on Exchange Settlement balances to zero
the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.
Under the program to purchase longer-dated bonds, the Bank will buy bonds issued by the Australian Government and by the states and territories,
with an expected 80/20 split. These bonds will be bought in the secondary market through regular auctions, with the first auction to be held this
Thursday for Australian Government securities. Further details of the auctions are provided in the accompanying market notice.
The Bank remains prepared to purchase bonds in whatever quantity is required to achieve the 3-year yield target. Any bonds purchased to support
this target would be in addition to the $100 billion bond purchase program.
At today's meeting, the Board also considered an updated set of economic forecasts. The global economy has been recovering from the initial virus
outbreaks, with the recovery most advanced in China. Even so, output in most countries remains well short of pre-pandemic levels and recent virus
outbreaks pose a downside risk to the outlook, particularly in Europe.
In Australia, the economic recovery is under way and positive GDP growth is now expected in the September quarter, despite the
restrictions in Victoria. It will, however, take some time to reach the pre-pandemic level of output. In the central scenario, GDP growth is expected to
be around 6 per cent over the year to June 2021 and 4 per cent in 2022. The unemployment rate is expected to remain high, but to peak at a
little below 8 per cent, rather than the 10 per cent expected previously. At the end of 2022, the unemployment rate is forecast to be around
6 per cent.
This extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years.
In underlying terms, inflation is forecast to be 1 per cent in 2021 and 1½ per cent in 2022. In the most recent quarter, year-ended CPI inflation was
0.7 per cent and, in underlying terms, inflation was 1¼ per cent.
The Board views addressing the high rate of unemployment as an important national priority. Today's policy package, together with the
earlier measures by the RBA, will help in this effort. The RBA's response is complementary to the significant steps taken by the Australian
Government, including in the recent budget, to support jobs and economic growth.
The combination of the RBA's bond purchases and lower interest rates across the yield curve will assist the recovery by: lowering financing costs for
borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets. At the same time, the RBA's Term
Funding Facility is contributing to low funding costs and supporting the supply of credit to the economy. To date, authorised deposit-taking institutions
have drawn $83 billion under this facility and have access to a further $104 billion.
Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time. For its part, the Board will not
increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to
be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. Given the outlook, the
Board is not expecting to increase the cash rate for at least three years. The Board will keep the size of the bond purchase program under
review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.
There will be a press conference at 4:00pm AEDT today.
November 3, 2020 3
Economic Insights. Reserve Bank goes ‘all in’
Implications for home buyers
The following table shows current monthly repayments on a range of mortgages and projections if rates are cut by
major lenders in response to the lower cash rate. The Reserve Bank notes that the Banks Standard Variable
owner-occupier rate is currently 4.52 per cent. And the Banks Discounted Variable owner-occupier rate is
currently 3.65 per cent.
November 3, 2020 4
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