Governor of the Reserve Bank of Australia (RBA) Philip Lowe has updated the market on the central bank’s outlook for the domestic economy, which continues to grapple with the ongoing COVID-19 crisis.
According to Mr Lowe, the RBA is expecting sharp deterioration in key economic indicators over the coming months, including a 10 per cent fall in national output and income (GDP) – the sharpest contraction since the 1930s.
Mr Lowe added that spurring this decline would be a reduction of around 20 per cent in total hours worked in Australia over the first half of 2020, with the unemployment rate likely to spike to 10 per cent by June.
“These are all very large numbers and ones that were inconceivable just a few months ago,” he said. “They speak to the immense challenge faced by our society to contain the virus.”
The RBA is also expecting a steep decline in inflation, which Mr Lowe said is likely to turn negative in June.
“This would be the first time since the early 1960s that the price level has fallen over a full year,” he said.
Mr Lowe acknowledged that economic data released over coming months would “present a very sobering picture of the state of our economy”, with “many reports of record declines in economic activity”.
However, the RBA governor stressed that the current crisis would pass, adding that a “bridge has been built” through combined fiscal and monetary policy efforts to help the economy withstand current headwinds.
Bank stockpiles soar
Such efforts to “build the bridge” include the RBA’s vast program to provide low-cost funding to banks through its $90-billion term funding facility, overnight market operations and government bond purchases on the secondary market.
Mr Lowe has revealed that as a result of these programs, funds held by banks in exchange settlement accounts (ESAs) have soared from just $2.5 billion in early March to approximately $83 billion.
According to Mr Lowe, the “very large increases” in ESA holdings have reduced demand for additional liquidity boosts via the overnight money market and have contributed to a 10 bps decline in the cash rate from 0.25 per cent to 0.15 per cent.
Further, Mr Lowe noted that liquidity support from the RBA has resulted in a narrowing of the margin between the bank bill swap rate and the overnight index swap rate, reducing cost pressures for both banks and non-banks.
The governor said that as a result, the RBA would “scale back” its daily market operations and purchases of government bonds unless further liquidity support is required.
Mr Lowe concluded by stating that he is optimistic about the future of the Australian economy, given the multifaceted support provided by government, the central bank and the private sector.
“Our monetary response is keeping funding costs low across the economy and credit available. The fiscal response is providing significant support to both jobs and incomes,” he said.
“Businesses are also helping their employees by keeping them on where they can, and the banks are supporting their customers with more flexible terms.”
He concluded: “Together, these efforts are helping the Australian economy through a difficult period and positioning us well for the recovery.”
[Related: Banks draw down $2.4bn from $90bn TFF]