The Reserve Bank of Australia (RBA) met on Tuesday May 5, and as widely expected, it left the cash rate on hold. The central bank has said it doesn’t want the cash rate to go to zero or negative, so we expect the current rate is effectively the lower bound.
More broadly, there were no new substantial monetary policy moves, for the simple reason that the RBA made some big moves back in March in response to the COVID-19 crisis. At this time, it looks as they’re in wait and see mode, - satisfied with the significant policy easing it has already undertaken and waiting to see if it works.
The RBA noted financial markets are starting to operate a bit more normally compared to weeks gone past. They’re not quite normalised at this stage, but they’ve progressed enough that the central bank has been able to scale back their purchases of bonds as part of their quantitative easing program. This doesn’t signal that quantitative easing has ended, it just means they don’t need to purchase as many bonds as they were at this point.
In addition, the RBA said when they undertake open market operations – that’s basically when they inject cash into the financial system in Australia – they’ll accept a wider range of collateral from counter-party organisations to do that. In the grand scheme of things, that’s not going to have a huge impact.
What does this mean for Australian investors and the economy?
There are a few implications flowing from the RBA’s meeting. The first, as we have come to expect, is that we’re going to have very low interest rates for a long time. The central bank said it won’t be raising the cash rate until it sees progress towards full employment and is confident of sustainably meeting its inflation target. So, the unemployment rate needs to go down and, at the moment, it’s going up. And the RBA indicated it sees inflation going negative in the current quarter. So, on both of the RBA’s objectives there is still a lot of work to be done, meaning there’s no interest rate hike in the near term. And with recovery likely to be gradual spare capacity will remain in the economy for a while yet indicating inflation will remain low for some time. So low rates will be with us for a long while.
The other aspect to consider from all of this, for investors who are invested beyond cash and bank deposits: there’s a light at the end of the tunnel.
The base case economic growth forecast that the Reserve Bank provided is quite bleak, allowing for a 10% contraction in the economy for the first half of this year. But then, there’s a recovery projected in the second half of the year and going into next year. Those forecasts are similar to our own, we also expect a 10% contraction, probably in the June quarter of this year.
For the short term, we know the numbers aren’t looking good, but as we come to a point where we can start easing the lockdown, then we should start to see some return of economic activity and growth as we go through the second half of the year. This should provide a bit of confidence for investors in things like shares, that ultimately economic, conditions will start to improve.
So, this week, it remains ad news for those relying on bank interest rates – you’re not going to get a very high return there. However, there is hope for returning to some sort of economic growth in Australia and some recovery from this crisis that we’re going through.
We’ve still got a way to go, and my view is that we could still see some more volatility in share markets in the very short term, but on a 12-month horizon, I think markets will probably be higher than where they are today.
Subscribe to SMSF News below to receive my latest articlesShane Oliver, Head of Investment Strategy & Economics and Chief Economist
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