Australia’s Central Bank Keeps Policy Unchanged, Awaiting Budget

© Bloomberg. The Australian flag flies outside the Reserve Bank of Australia (RBA) headquarters in Sydney, Australia, on Monday, Dec. 4, 2017. Australia's central bank is on track for its longest stretch of unchanged interest rates as it bets a tightening job market will begin to put upward pressure on wages -- at some stage. Photographer: Brendon Thorne/Bloomberg
© Bloomberg. The Australian flag flies outside the Reserve Bank of Australia (RBA) headquarters in Sydney, Australia, on Monday, Dec. 4, 2017. Australia’s central bank is on track for its longest stretch of unchanged interest rates as it bets a tightening job market will begin to put upward pressure on wages — at some stage. Photographer: Brendon Thorne/Bloomberg

(Bloomberg) — Australia’s central bank kept monetary policy unchanged Tuesday, clearing the field for the government to unveil a fiscal blueprint designed to drive the economy’s recovery from a Covid-induced recession.

Reserve Bank Governor Philip Lowe kept both the key interest rate and three-year yield target unchanged at 0.25%, as expected, having earlier expanded a bank lending program that officials said represented “substantial stimulus.” The most recent jobs report showed a fall in unemployment and the currency has edged back about 2% in the past three weeks, easing pressure to move.

“Public sector balance sheets in Australia are in good shape, which allows for continued support, with the Australian Government budget to be announced this evening,” Lowe said in a statement following the meeting. “Both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment.”

The RBA has been working in tandem with fiscal policymakers, pushing down the cost of borrowing to smooth the path for major spending programs. The government’s budget, due five hours after the rate decision, is expected to see a boost to infrastructure, the bringing forward of tax cuts and other measures to kickstart a recovery.

Economists expect the budget deficit will swell to A$220 billion ($158 billion), or 11.6% of gross domestic product, this fiscal year, and unemployment is forecast to rise to 8% by mid-2021 from the current 6.8%, according to the median estimate of a Bloomberg survey.

Expectations that the RBA would add to stimulus on the same day as the budget increased last month as economists predicted a “Team Australia” initiative of combined fiscal-monetary support. This view was buttressed when Deputy Governor Guy Debelle delivered a speech that set out potential additional policies. These included:

  • Buying bonds further out along the curve, supplementing the three-year yield target
  • Currency intervention, though he noted that “with the Australian dollar broadly aligned with its fundamentals, it is not clear this would be effective in the current circumstances”
  • Lower the current structure of rates in the economy a little more, without going negative, i.e. to 0.10% from 0.25%; and
  • Going negative, on which Debelle said the evidence is “mixed”

Yet Debelle also said that the government’s September expansion of its bank-lending program represented “substantial stimulus” and was in some ways similar to a QE program. The consensus view subsequently shifted to the RBA staying out of the government’s way on budget day to allow it to maximize the impact of its fiscal plan.

Australia’s recovery looks to regain momentum as the southeastern state of Victoria contains a serious outbreak of Covid that had forced it to impose the strictest lockdown in the country. With warmer weather approaching, a public wiser about the risks and authorities better able to run contact-tracing programs, there are grounds for optimism.

Nonetheless, analysts still expect the RBA to deliver further support as the Covid shock has blown the economy even further away from a mandate the central bank was struggling to achieve even before the virus. The debate is about when.

©2020 Bloomberg L.P.

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