Daily Commentary BY THE CURVE TEAM –

Restoring Confidence the Key for the RBA

22nd of May, 2020

Governor Lowe spoke yesterday and stated the key for the economy to return to pre-covid conditions is restoring confidence.

Speaking on a panel with the Council of Financial Regulators, Governor Lowe’s remarks echoed much of what we have heard from the RBA in recents weeks. He emphasised the economy returning to relative normality relied on the restoration of confidence.

“a critical issue for us here in Australia: that is, restoring people’s confidence on two fronts. The first is the confidence that we can go about our lives and remain healthy. And the second is the confidence that we will have jobs and incomes and the economy will grow strongly again.”

Just how they can do this is the obvious question. How does the RBA, whose tools are somewhat limited, restore confidence in the face of what they themselves declare to be the worst economic contraction since the great depression.

“We are living through the biggest and the most sudden economic contraction since the 1930s. Unlike previous contractions, this one is not being caused by a financial event or by macroeconomic policies. Rather, it is the result of society’s efforts to contain a pandemic.”

The RBA’s measures so far have been effective. Credit to worthy borrows is widely available and the cost to borrow is the lowest in history. The challenge is getting businesses to commit to new projects. The trigger for that restoration of confidence is likely outside the RBA’s control. In the last 24 hours we have seen further announcements from governments, both state and federal, committing to expediting the time line of key infrastructure investments. The projects aimed at stimulatory activity in the real economy will hopefully be seen by businesses as a positive factor in their own investment and employment decisions.

In news that does have slight implications for fiscal spending, this morning rating agency Fitch have reaffirmed the federal governments AAA credit rating, however did place this on a negative watch.

Matthew Dunshea

Client Relationship Manager