Australia’s central bank yesterday kept rates at record lows and pledged to keep three-year government bond yields at its 0.25 percent target as it predicted the COVID-19 pandemic would trigger a massive economic decline.
The Reserve Bank of Australia (RBA) on March 19 announced an out-of-cycle rate cut to 0.25 percent and an unprecedented stimulus package, which included an unlimited quantitative easing program.
The board yesterday confirmed all of the elements of that package, saying that it would not raise interest rates until it made progress in achieving its employment and inflation goals.
The decision comes as some economists predict the worst recession in Australia’s history, which would see the unemployment rate almost doubling to near 10 percent.
Economic indicators yesterday offered a foretaste of the pain to come with March job vacancies posting their largest drop in more than a decade.
“There is considerable uncertainty about the near-term outlook for the Australian economy,” RBA Governor Philip Lowe said in a short post-meeting statement.
“Much will depend on the success of the efforts to contain the virus and how long the social distancing measures need to remain in place,” Lowe added. “A very large economic contraction is, however, expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years.”
Restrictions on people movement and gatherings have forced many businesses in hospitality, retail, transport, education and even community services to shut down. Businesses that remain open face falling sales and increasing operational restrictions.
A survey released yesterday by the Australia and New Zealand Banking Group (ANZ) showed that total job advertisements last month fell 10.3 percent from February, the steepest decline since January 2009, when the global financial crisis was raging.
Separately, a service sector index showed that activity last month shrank for a fourth straight month, as it fell to the lowest in 11 years.
It was not all gloom, with another survey released yesterday by ANZ and Roy Morgan showing that consumer sentiment bounced last week after two months of drastic declines, as a government “JobKeeper” plan to subsidize some workers somewhat lightened the mood.
In anticipation of a steep contraction in GDP, the central bank has so far bought A$38 billion (US$23.46 billion) of Australian government bonds — or nearly 7 percent of outstanding stock — to help keep borrowing costs low.
The functioning of the bond market has improved since it launched its quantitative easing program on March 20, the bank said, adding that “smaller and less frequent purchases” would likely be required.
That remark led to a sell-off in long-term bonds, sending 10 year yields to a 10 day high of 0.951 percent. The Australian dollar also spiked to a one-week high of A$0.6168 against the greenback.
“That extremely aggressive pace of [bond] purchases can’t be sustained for long,” Marcel Thieliant of Capital Economics Ltd said. “A case could still be made for corporate bond purchases, as spreads have continued to widen.”
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