Daily Commentary BY THE CURVE TEAM –

Fiscal and Monetary Updates Steal Show

11th of March, 2021

Numerous updates were announced yesterday, notably by the RBA and government, which will have a substantial impact on the outlook over the short and medium term.

RBA Governor Lowe made a speech yesterday which made clear that they are defiant despite recent changes in market expectations. Markets have recently lifted inflation expectations, not above the targeted 3% upper bound of the RBA, but within the 2-3% target range.

Markets have also brought forward when they expect the RBA to increase the cash rate, despite the RBA repeatedly saying they do not expect to increase the cash rate prior to 2024. Lowe reiterated their expectations emphasising wage pressure is needed for sustainable inflation, and that even with spikes in inflation, the RBA will only tighten policy if they view it as sustainable.

As a result of the speech bond yields fell. At last check, the 10 year government bond yield was 1.67%, with recent highs of 1.92%.

From the government, policies alluded to earlier in the week came to fruition. The policy that grabbed most attention was the airfare subsidies being made available for domestic travel, which will half the price of plane tickets.

Arguably of more significance were the announced changes to the Recovery Loan Scheme, which promotes lending to small and medium businesses. Potential loan sizes have been increased to $5 million from $1 million, businesses with turnover of $250 million instead of $50 million will be eligible, loan lengths have been extended from 5 years to 10 years and interest rates will be lower with the updates.

Crucially, the government guarantee on these loans has lifted from 50% to 80%. A similar scheme in Britain guarantees 100% of the loans and has already led to over 40 billion pounds of lending.

Concerns have arisen of zombie firms surviving longer as banks have no i9ncentive to get the loans off their books because they only stand to gain the longer the firm survives. Although Australia’s programme is only 80% government guaranteed, the risk for banks has still been mitigated substantially, so similar issues may eventuate here.

Also, consumer confidence was released yesterday for March, and rose 2.6% to be 112. The rises were broad based across the indicators, which especially bodes well for the likelihood that consumers will spend their 12% savings buffer.

Josh Stewart

Associate - Money Markets