The Governor has maintained his growth forecast for 2020 despite the developments in Victoria; the AUD also appears to be a long way from his “pain threshold”.
As expected, the Reserve Bank Board decided to maintain its policy settings including the targets for the cash rate and the three year bond rate at 25 basis points.
The Governor retains his cautious view on the global economy, noting that the worst of the contraction has now passed but the outlook remains highly uncertain.
Markets have been expecting that, in light of a slight upward drift in the three year bond rate and no purchases by the Bank since the first week in May, the Bank might re -enter the market. In fact, the Governor has indicated that the Bank will purchase AGS in the secondary market tomorrow aiming specifically at keeping the three year rate consistent with the target.
The Governor also revealed that $29 billion of the available Term Funding Facility has been drawn down. Last month he pointed out that due to banks’ increasing their loans to small business ($5 million per million lent) and large business ($1 million per million lent) the facility had increased from $90 billion to $150 billion. With the facility needing to be drawn down by end September there is likely to be a considerable boost to system liquidity in the December quarter. That boost will support the economy in negotiating the so called fiscal cliff where we estimate that the federal government currently expects that transfers to households and business will be reduced from $80 billion in the September quarter to $15 billion in the December quarter.
The Bank is scheduled to release its revised economic forecasts in its Statement on Monetary Policy on August 7. Today, the Governor noted that the economy is expected to contract by 6% in 2020. Given the recent developments in Victoria the fact he has not revised down the growth forecast from the May Statement on Monetary Policy leads us to conclude that the Bank has been positively surprised by the growth progress in the other states.
It has lowered its forecast for growth in 2021 from 6% to 5%, now sensibly recognising that activity in the economy by end 2021 will be lower than at the beginning of 2020.
Westpac has been consistently more constructive on the growth outlook for 2020. Prior to the adverse developments in Victoria we had been expecting the economy to contract by 4.2% in 2020. We now expect a contraction of 4.7% in 2020 including a contraction of 9% in Victoria in the September quarter.
We have consistently expected the growth momentum in 2021 to be much lower than the 5% forecast by the Bank at around 3%.
The Bank has also lifted its forecast for the unemployment rate by end 2020 from 9% to 10% “due to further job losses in Victoria and more people in Australia looking for a job”. There has been no change in the growth forecast for 2020 and yet there has been an increase in the unemployment forecast.
That issue highlights the difficulties in this cycle in assessing the outlook for the unemployment rate. Uncertainties about participation; the transition from JobKeeper to JobSeeker; the future policy outlook; and the part time/full time split exacerbate the challenge around forecasting the unemployment rate more than in any previous cycle.
Recall that the forecasts in May have been based on AUD at USD 0.64 over the forecast period. The AUD is now around USD 0.71 but it appears that the Bank has not materially changed its growth forecasts. Accordingly, with still no comments from the Governor about the AUD in this Statement, it seems that the Bank’s “pain threshold“ for the AUD is some way off.
The policy outlook is unchanged, with a consistent support for expansionary fiscal policy with the accommodative monetary policy stance being “maintained as long as it is required”.
Our more detailed forecasts for the economy in light of the recent developments in Victoria will be released tomorrow.
