RBA seen ‘on hold’ for the foreseeable future – UOB

Economist Lee Sue Ann at UOB Group reviewed the latest RBA event, where the central bank left the cash rate unchanged.

Key Quotes

“Following the May meeting, the Reserve Bank of Australia (RBA) decided to maintain its current policy settings, including the targets for the cash rate and the yield on 3- year Australian Government bonds of 25 basis points.”

“Going forward, we continue to expect a large fall in GDP in 2Q20 of -4.6% y/y, followed by smaller contractions of -2.8% y/y in 3Q20 and -0.9% y/y in 4Q20. We expect a further rise in the unemployment rate, for it to reach 10% by the end of this year, before only a partial recovery towards 8.0% in 2021. Hence, labour market indicators are likely to be important for policy going forward.”

“The 3-year Government yield in Australia is sitting comfortably near 0.25%. As such, we do not see further reductions in the cash rate, with negative rates ruled out by RBA Governor Phillip Lowe (for now). The focus will thus remain firmly on end-user rates via the yield curve target, as well as ensuring sufficient liquidity in bond markets and the free flow of credit to households and business. We also think that the fiscal policy arm will have to strengthen to provide support in the recovery phase.”