RBA Holds Rate, Australian Economic Outlook Cautiously Promising

June 2, 2020 Updated: June 2, 2020

The Reserve Bank of Australia has kept the cash rate at a record low 0.25 percent at its monthly board meeting as it assesses the extent of the COVID-19-driven economic downturn.

Economists had widely expected the central bank to hold the benchmark rate at the current level.

Governor Philip Lowe on June 2 said the RBA board had decided to maintain the current policy settings, including the targets for the cash rate and the 25-basis point yield on three-year Australian government bonds.

The RBA cut rates twice and announced quantitative easing measures in March in an effort to cushion the economy from the impact of the COVID-19 pandemic.

“This accommodative approach will be maintained as long as it is required,” Lowe said.

Bond purchases by the central bank have so far totalled about $50 billion and it has purchased government bonds on only one occasion since the previous month’s board meeting, in a sign Australia’s government bond markets is operating effectively.

The RBA says it is prepared to scale up purchases again and do whatever is necessary to ensure bond markets remains functional and the three-year AGS yields stay at current levels

The governor was more upbeat on the economic impact of the coronavirus, saying it was possible the depth of the downturn would be less than expected.

He noted some restrictions were being eased earlier than expected, there were signs hours worked stabilised in May, and there had also been a pick-up in some forms of consumer spending.

“However, the outlook, including the nature and speed of the expected recovery, remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy,” Lowe said.

The Australian Bureau of Statistics will release March quarter GDP figures on Wednesday, with market expectations of a 0.2 to 0.3 percent contraction.

However, economists widely expect a sharp contraction of 6 to 8 percent in the June quarter due to the COVID-driven lockdowns.

The RBA last month forecast the economy to contract by 6.0 percent this year. It expects the unemployment rate to hit 10 per cent by June and remain about 7.5 percent through 2021.

The central bank would not increase the cash rate target until progress was made towards full employment and it was confident inflation would be sustainably within the 2.0 percent to 3.0 percent target band, Lowe said.

“Perhaps what was not in the statement was more interesting,” RBC Capital Markets economist Su-Lin Ong said, referring to increasing speculation over negative interest rates, as well as the recently rallying Australian dollar.

The Aussie dollar on Tuesday hit a five-month high of 68.17 US cents as investors bet on a recovery for the global economy.

Prashant Mehra