Daily Commentary BY THE CURVE TEAM –

RBA Emphasises Uncertain Outlook

19th of August, 2020

The RBA minutes for the August board meeting indicate the economic scenario is highly uncertain, whereas the policy stance is very clear.

Evidence of the uncertainty in the economy is the RBA’s use of a baseline, upside and downside scenario for its forecasts. This is reasonable given the outlook for the economy is highly dependant on the spread and containment of Covid-19, which is very unpredictable.

In its baseline scenario, GDP falls 6% this year and unemployment peaks at 11%. It assumes that the Victorian lockdown is not extended and international borders are opened as of mid 2021. Even though this scenario assumes a strong rebound in economic activity in 2021 and 2022, the economy is not forecast to recover to levels forecast pre-covid.

The downside scenario would involve ongoing lockdowns, a slow global economic recovery and borders being shut even longer into next year. Even if this were to occur though, there is only so much more the RBA can do to support the economy.

The initial policy change in March to respond to Covid-19 was colossal. Even now, liquidity in the financial system is at record levels, borrowing rates are at all-time lows and the RBA still stands prepared to buy government bonds should spreads widen or panic begin. These conditions mean the RBA and financial system have a huge cushion should conditions sour, so it is likely only another extreme hit to the economy would force the RBA to further lax its policy stance.

Even in an upside scenario, the unwinding of its current policy’s would be gradual. The 3 year government bond target would be the first to go. Only once that is gone would an increase in the cash rate be considered.

The upside scenario appeared slightly more likely yesterday, with consumer confidence up 2.7% for the week as Victorian case numbers continued to decline. Talk of a vaccine also continues to gain steam, with reports of the government arranging contracts to purchase the vaccine from companies in association with the University of Oxford’s vaccine that is still in testing. Morrison has made clear that the vaccine would be free and available to all once it is approved to be used.

Josh Stewart

Client Relationship Manager