Daily Commentary BY THE CURVE TEAM –

RBA and Government Integral to Outlook

29th of September, 2020

As the end of month and year approaches there will be certain themes that will dominate the economic and interest rate environment.

Covid-19 has been the key factor for the economy and interest rates for the majority of the year and will continue to be so for the foreseeable future. As living with Covid-19 becomes the norm, other factors will have more influence.

First and foremost, will be any changes to monetary policy by the RBA. A further cut of the cash rate, Term Funding Facility rate and 3-year government bond target to 0.10% is expected either next week or in November.

The timing of this move and whether they also expand the government bond yield target further along the curve will almost certainly push interest rates further down. Reductions will probably be less consequential for the economy, as the cost of credit is not the issue with the economy, it is a lack of demand.

More relevant to this demand problem will be fiscal policy. The budget will be announced next week, the same day as the RBA Board meeting. There have been only a few announcements of what to expect so far.

One of those came today, with $800 million to be spent on assisting businesses to digitalise. This will involve amalgamating government platforms for businesses, some funds for business advisory programs and better systems to reduce fraudulent activity.

This spending is very targeted so will only have so much of an impact on the economy. Whether that will be the theme of the budget or whether the government will spend a lot and widely is unknown.

There are calls for the government to spend largely given the economy is in recession and interest rates are so low. An expansionary budget would do much to fill the hole in demand the economy is currently experiencing. The government may be conscious though of incurring too much debt and spending wastefully.

Josh Stewart

Client Relationship Manager