Daily Commentary BY THE CURVE TEAM –

RBA and APRA Remain Cautious on the Outlook

29th of May, 2020

Appearing before a Parliamentary Committee on Covid-19 yesterday both the RBA and APRA sounded warnings over the outlook.

Yesterday’s Parliamentary Committee on Covid-19 saw both the RBA and APRA questioned on how they have handled their roles during the pandemic and what the outlook may hold. While the initial message was that the outcomes thus far aren’t quite as bad as first feared, there remains a substantial cloud over the outlook with a number of hurdles on the road ahead.

Governor Lowe was the first to appear and made some interesting revelations once his opening statement was out of the way and the questions started to flow. He continued to talk down the prospects of negative rates. Lowe continues to stress that negative rates are not practical based on the structure of Australia’s financial and banking structure and doesn’t think that they work.

He was also candid on the RBA’s ability to do much more than they are doing. He suggested that if needed they could continue to buy more government bonds to keep risk free rates low. However, beyond that it is now up to the government. He said that for the past couple of decades the central bank’s use of monetary policy had been the main lever used to support the economy when it was needed. Now it is over to the government and fiscal policy to take up the reigns.

APRA’s Wayne Byres was also relatively upbeat on the regulators response since the crisis began. He also continues to highlight that previous changes to regulatory standards following the GFC have put Australia’s financial system on solid footing, giving it the ability to withstand the current headwinds it faces.

However, both gave warnings over the outlook, especially around temporary measures that have been put in place to support households throughout the crisis. Governor Lowe warned that removing programs such as JobKeeper too soon if the pace of the economic recovery didn’t warrant it would not be wise.

Meanwhile Byres warned on the potential cliff we face in September-October when mortgage holidays are set to end. He said that the closer we get to that point in time “We’ll understand the nature of the problem better. We want to make sure it doesn’t become a cliff and we hit a cliff and all that support disappears at once.”

What was clear from both the RBA and APRA is that uncertainty will continue to hang over the economy until the recovery is on stable footing and the crutches that are propping up the economy are safely removed.

David Flanagan

Director - Interest Rate Markets