While the immediate outlook is highly uncertain, the RBA believes that Australia will experience a “very sharp contraction” in economic activity.
“While it was not possible to provide an updated set of forecasts for the economy given the fluidity of the situation, it was likely that Australia would experience a very material contraction in economic activity, which would spread across the March and June quarters and potentially longer,” the RBA wrote in the minutes of its 18 March emergency meeting.
At that meeting the RBA made the historic decision to deploy Australia’s first quantitative easing campaign, setting a target for the yield on three-year Australian government bonds of 0.25 per cent.
“In considering the overall package of measures that had been discussed, members acknowledged that the term funding scheme and the three-year bond yield target were both significant policy developments that would not have been under consideration in normal times,” the board wrote.
“Nonetheless, members strongly supported the proposed policy response as a comprehensive package to complement the fiscal response announced by governments in Australia in the preceding week or so.”
The RBA also continued its campaign of interest rate cuts, slashing rates to 0.25 per cent – but it’s likely that 0.25 per cent is as low as the RBA will go.
“Members also agreed that the cash rate was now at its effective lower bound,” the board wrote in its minutes.
“Members had no appetite for negative interest rates in Australia.”
The RBA sought to emphasise that the bank expected a recovery once the coronavirus outbreak is contained, supported by the low cost of funding across the economy.
