SYDNEY: The Reserve Bank of Australia gave its clearest signal yet on Tuesday that it will cut interest rates further and announce a multibillion dollar government bond purchase program in November to help accelerate the economic recovery that is currently emerging in most states, as Covid-19 cases drop and freedom of movement is gradually being restored.
In the minutes of its October 6 policy meeting, the RBA revealed in detail its thoughts on options to further support business activity and job growth, arguing that cutting interest rates to new now was more likely to get results than it was in April. and in May, when business lockdowns and the closure of national and international borders saw economic activity spike.
Further RBA easing in November will boost confidence ahead of the crucial Christmas sales period, and will ring in nicely with the government’s 2020-21 budget announced earlier this month, which called for income tax cuts and shifted. to strongly support business investment, pivoting the pandemic response from saving the economy to pushing it back to growth.
The RBA has made it clearer its intention to do more for the recovery, as Standard and Poor’s rating agency upheld the country’s AAA sovereign credit rating, adding that public sector debt remains manageable even after the budget. success of the government which pledged to maintain the stimulus until unemployment falls.
“The Australian economy is starting to recover from its first recession in almost 30 years. We expect its fiscal recovery to follow over time,” the rating agency said. Yet “the Covid-19 pandemic has caused Australia a severe economic and fiscal shock, which has dramatically deteriorated the government’s fiscal leeway to ‘AAA’ rating level,” he warned.
S&P’s announcement is another vote of confidence in the government’s response to the health and economic crisis caused by Covid-19, Treasurer Josh Frydenberg said in a statement. The record levels of economic support provided so far have saved 700,000 jobs, he added.
The RBA is expected to announce a number of policy changes in November, including lowering its official cash rate to a record 0.1%, from 0.25% now, while lowering its bond yield target. State at three years at the same level. level.
But the likely launch of a government bond buying program, also known as quantitative easing, will be the focus of attention, which will target lower yields on Australian government bonds at five years and ten years. This would further reduce borrowing costs for banks and remove a key source of upward pressure on the Australian dollar.
Until recently, Australian government bond yields were among the highest in the world, which baffled the RBA.
RBA board members noted “that greater balance sheet expansion by other central banks relative to the Reserve Bank was contributing to lower sovereign yields in most other advanced economies than in Australia. Members discussed the implications of this for the Australian dollar exchange rate. “
A surge in the Australian dollar now would negate many of the benefits of the stimulus measures announced so far by eroding exports which are already struggling with a weakened global economy.
“While there has been some uncertainty in the market as to whether a QE package will be unveiled in November, the minutes seem to show that the board has already concluded that further QE would be beneficial,” National Australia Bank economist Tapas Strickland said.
The RBA also said cutting interest rates now will help strengthen the economy, reduce potential risks from falling house prices and housing demand, while supporting banks in pushing back the hike. mortgage defaults.
“Overall, the board considered financial stability likely to benefit from a stronger economy, while recognizing that risks in asset markets need to be closely monitored,” the minutes said. .
The wave of fiscal and monetary stimulus currently sweeping the economy is boosting consumer confidence. The ANZ-Roy Morgan weekly survey of consumer sentiment rose 0.4% last week, its seventh consecutive gain, and also erasing a sharp drop in confidence that closely followed trade lockdowns announced in March.
“Further easing of Covid-19-induced restrictions is expected to support the index this week as it seeks to return to pre-pandemic levels,” said David Plank, ANZ Australia’s chief economy officer.
Write to James Glynn at [email protected]