The RBA held its October board meeting today. Though there wasn’t as much movement as we expected, there were four key take-aways:
1. The RBA left the cash rate on hold
The RBA left the cash rate on hold at 0.25% for the seventh month in a row. With the RBA recently explicitly stating that its forecast outlook for inflation and employment is not consistent with its objectives - and regularly running through a list of options for further policy easing over the last month or so - we had thought it would move today with another rate cut to 0.1%. Still, our base case remains that the RBA will cut the cash rate to 0.1%, now at its November meeting.
2. Recovery is happening, but it’s uneven
The RBA noted again that a global economic recovery is underway, but it remains uneven and dependent on containing the virus. While a recovery is also underway in most of Australia, the RBA sees that it is likely to be uneven and bumpy.
3. The RBA will do more
Given the uncertainty around the pace of recovery, the RBA reiterated its commitment to do “what it can” to support jobs, incomes and businesses and its commitment to “not increase the cash rate until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3% target band.”
The central bank also repeated its easing bias by again noting that it “continues to consider how further monetary measures could support jobs as the economy opens up further.” Consistent with its focus on unemployment it tweaked the end bit of that statement from support for the “recovery” to support for “jobs”. The emphasis on jobs was further underlined by the RBA’s comment that it “views addressing the high rate of unemployment as an important national priority.”
Most of the effort to boost jobs will fall to fiscal policy and the Budget, but the RBA can also further aid the process and we think it will.
4. Unemployment will peak (a bit) lower
While it now sees the unemployment rate peaking at a lower rate than earlier expected (10%), the RBA notes that “unemployment and underemployment are likely to remain high for an extended period.”
What do we think is next?
As mentioned, our base case remains that the RBA will cut the cash rate, as well as the Term Funding Facility rate and the three year bond yield target to 0.1%. We think the RBA will make these moves next month after it has updated its forecasts, which will likely show that its employment and inflation objectives are still not going to be met over the next two years at least.
Over the next six months we also see the RBA moving towards inflation average targeting and therefore tweaking its forward guidance to say that it won’t raise the cash rate until full employment is reached and inflation is sustainably within the 2-3% target band. And we also see it adopting a more traditional quantitative easing program extending bond buying beyond the three-year bond.
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