Australia: RBA keeps the steady hand, expands QE – UOB

Economist at UOB Group Lee Sue Ann assesses the latest RBA event (Tuesday).

Key Quotes

“The Reserve Bank of Australia (RBA), at its first meeting of the year, decided to maintain the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility. However, it did decide to purchase an additional AUD100bn of bonds issued by the Australian Government and states and territories when the current bond purchase program is completed in mid-April. These additional purchases will be at the current rate of AUD5bn a week.”

“Clearly, unemployment has been recognized as the biggest policy and domestic problem arising from the COVID-19 pandemic… the RBA changed its forecast for unemployment to hit 6% by the end of this year. The RBA’s November forecast anticipated the unemployment rate falling through 2021 from 8% to 6.5%.”

“The RBA has also lowered its GDP forecast for this year to grow by 3.5%. The bank’s previous forecast for GDP was for a 4% contraction in 2020, whilst GDP would bounce 5% by the end of this year. The Australian economy lifted out of a technical recession after posting 3.3% q/q jump in 3Q20, following the record 7.0% q/q decline in 2Q20.”

“We look for the cash rate to remain unchanged until at least mid-2024, in line with the RBA’s guidance. Whilst the outlook has improved, the pandemic has still been a large hit to the economy such that exceptionally easy policy is warranted. Hence, we were anticipating an extension in QE, although the timing was a little earlier than expected, as we previously thought the annoucement would only come in March. On the term funding facility (TFF), we think the RBA is likely to let it end at its scheduled date of June 2021.”