RBA keeps policy on hold

Bloomberg

Australia’s central bank (RBA) kept monetary policy unchanged on Tuesday, clearing the field for the government to unveil a fiscal blueprint designed to drive the economy’s recovery from a Covid-induced recession.
Reserve Bank Governor Philip Lowe kept both key interest rate and three-year yield target unchanged at 0.25%, as expected. The labour market is a key focus for the bank, which is due to release fresh forecasts next month, he said.
“The Board views addressing the high rate of unemployment as an important national priority,” Lowe said in a statement. Policy settings will remain highly accommodative for as long as required and the bank “continues to consider how additional monetary easing could support jobs as the economy opens up further,”
he said.
The RBA has been working in tandem with fiscal policy makers, pushing down the cost of borrowing to smooth the path for major spending programs. The government’s budget,
due five hours after the rate decision, is expected to see a boost to infrastructure, the bringing forward of tax cuts and other measures to
kick-start a recovery.
The RBA said labour market conditions have improved and the peak in the jobless rate could be lower than previously expected. Still, unemployment and underemployment were likely to remain high for an
extended period.
Economists expect the budget deficit will swell to $158 billion, or 11.6% of gross domestic product, this fiscal year, and unemployment is forecast to rise to 8% by mid-2021 from the current 6.8%, according to the median estimate of a Bloomberg survey.
“Public sector balance sheets in Australia are in good shape, which allows for continued support, with the Australian Government budget to be announced this evening,” the RBA said. “Both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment.”
The RBA’s statement “sounded dovish and left the door open for additional stimulus,” said Marcel Thieliant, senior economist at Capital Economics in Singapore. “We now expect the bank to cut the cash rate target, the 3-year yield target and the interest rate on the term funding facility to 0.1% at its November meeting. We also expect the bank to announce additional purchases of government bonds in order to reduce long-term interest rates.”