By James Glynn
SYDNEY: The Reserve Bank of Australia gave its clearest signal yet Tuesday that it will cut interest rates further and announce a multi-billion dollar program of government bond-buying in November to help fast-track the economic recovery now emerging in most states, as Covid-19 cases fall and freedom of movement is steadily restored.
In the minutes of its policy meeting held on Oct. 6, the RBA revealed in detail its thinking around options to further fan business activity and jobs growth, arguing that cutting interest rates again now was more likely to get results than it was back in April and May when business lockdowns and the closure of state and international borders saw economic activity crater.
Further easing by the RBA in November will bolster confidence ahead of the crucial Christmas sales period, and chime well with the government's 2020-21 budget announced early this month that brought forward income tax cuts and moved to forcefully support business investment, pivoting the response to the pandemic from rescuing the economy to steering it back toward growth.
The RBA made its intentions to do more for the recovery clearer, as ratings agency Standard and Poor's affirmed the country's AAA sovereign credit rating, adding that public sector debt remains manageable even after the government's blockbuster budget that pledged to keep stimulus going until unemployment falls.
"Australia's economy is beginning to recover from its first recession in almost 30 years. We expect its fiscal recovery will follow over time," the ratings agency said. Still, "the Covid-19 pandemic dealt Australia a severe economic and fiscal shock, which has substantially deteriorated the government's fiscal headroom at the 'AAA' rating level," it warned.
S&P's announcement is a further vote of confidence in the government's response to the health and economic crisis caused by Covid-19, Treasurer Josh Frydenberg said in a statement. The record levels of economic support provided so far have helped save 700,000 jobs, he added.
The RBA is set announce a number of policy changes in November, among them a lowering of its official cash rate to a record low 0.1% from 0.25% now, while also cutting its target for the yield on three-year government bonds to the same level.
But taking center stage will be the likely roll-out of a government bond-buying program, also known as quantitative easing, which will target lower yields on Australian government bonds at five-year and 10-year maturities. That would lower borrowing costs for banks further and remove a key source of upward pressure on the Australian dollar.
Until recently, Australian government bond yields were among the highest in the world, a fact that had unnerved the RBA.
RBA board members noted "that larger balance sheet expansions by other central banks relative to the Reserve Bank was contributing to lower sovereign yields in most other advanced economies than in Australia. Members discussed the implications of this for the Australian dollar exchange rate."
A surge in the Australian dollar now would undo much of the benefit of policy stimulus announced so far by eroding exports already battling a weakened world economy.
"While there has been some uncertainty in the market over whether a QE package will be unveiled in November, the minutes appear to show the board has already concluded that additional QE would be beneficial," said National Australia Bank economist Tapas Strickland.
The RBA also said that cutting interest rates now would help strengthen the economy, lowering potential risks around falls in house prices and housing demand, while supporting banks by pushing back on rising mortgage defaults.
"On balance, the board thought it likely that there were greater financial stability benefits from a stronger economy, while acknowledging that risks in asset markets had to be closely monitored," the minutes said.
The wave of fiscal and monetary stimulus now washing through the economy is lifting consumer confidence. The weekly ANZ-Roy Morgan survey of consumer sentiment rose 0.4% last week, its seventh consecutive gain, and also erasing a sharp downswing in confidence that followed hard on business lockdowns announced in March.
"Further easing of Covid-19 induced restrictions should support the index this week as it seeks to move back to its pre-pandemic levels," ANZ's Head of Australian Economics David Plank said.
Write to James Glynn at firstname.lastname@example.org