The Board Minutes print to co-ordinated monetary and fiscal policy stimulus to address economic threat of COVID-19; more to come.
The Minutes of the Monetary Policy Meeting of the Reserve Bank Board confirmed that the decision to lower the cash rate from 0.75% to 0.5% was driven by the Board’s concern about the impact of COVID-19 on the Australian economy and the world economy.
The Board noted that “even prior to the COVID-19 outbreak, progress towards full employment and the inflation target had been expected to be only gradual. The COVID-19 outbreak was expected to delay that progress further”.
The Board was encouraged by indications from the Australian Government that fiscal measures would be taken to support the economy. In turn, the Board confirmed that lower interest rates would provide support to the economy through jobs, a lower exchange rate, and a boost to the aggregate cash flows for households and businesses. Consequently, the Board recognised the importance of the RBA playing its role through a joint monetary and fiscal policy response.
It was considered unlikely that the virus would be contained in the very near future so that the rate cut would only boost the economy in the recovery phase. It was most likely that the virus would have a significant effect on the Australian economy and monetary policy support was necessary.
At recent meetings, the Board has been cautious about the impact that lower rates might have through encouraging additional borrowing during a strong upswing in the housing market. However, the heightened uncertainty created by the virus eased these concerns .
There was considerable uncertainty about how long it would take the economy to return to more normal levels of activity. GDP growth in the March quarter was expected to be noticeably weaker than previously expected. The impact of the decline in services exports in the March quarter alone was expected to take half a percentage point from growth in the quarter.
The final paragraph in the minutes confirmed that the Board “agreed on the importance of monitoring the rapidly changing developments closely in subsequent weeks and maintaining contact to assess the implications of the COVID-19 outbreak for the economy. [It] was prepared to ease monetary policy further to support the Australian economy”.
Conclusion
Since the Board meeting, the RBA has announced a series of initiatives to boost liquidity in the financial markets. Those initiatives have included generous provision of repo facilities going out to as long as “six months maturity or longer” and “standing ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market”.
The RBA has also announced that additional policy initiatives will be outlined at 4 pm on March 19th.
These Minutes provide further support to Westpac’s view that a further 0.25% reduction in the cash rate can be expected. That is almost certain to be the effective lower bound for the cash rate as set out by the Governor in a speech on November 26th.
In addition, the much awaited quantitative easing will also be announced. That policy will be targeted at the risk free yield curve effectively setting a price rather than nominating a quantity of purchases as has been used by the FOMC.
