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RBA expects a “material contraction” in the economy, minutes reveal

RBA expects a “material contraction” in the economy, minutes reveal

The coronavirus outbreak has taken a devastating toll on the Australian economy, and according to recently released minutes the Reserve Bank believes the current period of disruption could extend to the latter half of the year.While charting the outcome of the crisis will be difficult, the Board expects Australia to experience “a very material contraction in economic activity,” which will last through the March and June quarters and possibly beyond that.“The size of the fall in economic activity would depend on the extent of the social distancing requirements, and potential lockdowns, put in place to contain the virus,” the minutes say.The Board met ahead of schedule on March 18 amid fears the coronavirus outbreak could tip the country into a recession. It announced the following day it will be cutting official interest rates to 0.25%, commencing bond purchasing, and establishing a $90 billion facility to help banks access cheap loans.Since then, closures of non-essential businesses and restrictions on public and private gatherings have brought entire swaths of the economy to a standstill.To curb the fallout, the Federal Government has announced several rounds of stimulus packages, most recently the JobKeeper scheme — a $130 billion subsidy to businesses to help keep employees on the payroll.RELATED: How do I receive the government’s coronavirus support payments?The Board agreed that unemployment is set to surge in the coming months, though there is an expectation that some industries will fare better than others. “There were likely to be significant job losses over the months ahead, although the extent of this would depend on the capacity of businesses to retain employees during this period.”“At the same time, some industries were employing more workers, particularly those involved in the retail supply chain and delivering goods.”The Board also ruled out further monetary easing and made clear that it has “no appetite” for negative interest rates. The official cash rate will remain unchanged until progress is made towards full employment and an inflation target of 2-3%.The same goes for the Board’s bond purchasing program, though it flagged that it would sooner end that program than raise the cash rate.While the buying up of government bonds by a central bank sounds a lot like quantitative easing, the RBA has been reluctant to use the term. That’s because this particular program isn’t so much focused on the quantity of bonds purchased (as in the US, where the Fed recently committed to buying $700 billion worth), but with preserving low funding costs.It will do this by targeting the yield on three-year Australian Government bonds, hoping to bring it down from around 0.45%, where it had been hovering for several weeks, to 0.25%.“The specific proposal was to target the rate at the three-year mark, given its importance as a benchmark rate in financial markets and its role in funding across much of the Australian economy,” the minutes say.“Such a target would also be consistent with the expectation that the cash rate would remain at a very low level for several years.”

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