Dr Brendan Rynne, KPMG Chief Economist, comments on today’s RBA announcement
The final RBA Board meeting of the year saw a continuation of the loosest monetary policy arrangements Australia has ever seen. This was unsurprising, but is the right approach. While GDP results for the September quarter (due tomorrow) are expected to show a return to positive growth, the economy is still limping and the RBA’s accommodative stance is not only welcome but necessary.
Last month’s RBA announcement saw the Bank use its last remaining gunpowder – ammunition many economists were surprised it managed to find, given previous RBA statements on where the effective lower bound is for the cash rate in Australia. Since then, we have seen the Australian dollar continue to strengthen against the USD; which is the opposite of the outcome Governor Lowe hoped for. Other major banks are already playing the same game.
But the market reaction to this ‘every bit helps’ approach to monetary policy has been positive, and combined with the news during the month that a number of vaccine trials for the coronavirus have shown very good results, the expectation now is for Australia’s economic growth to recover sooner than previously anticipated.
This is revealed by the divergence in yields on longer dated government bonds between Australia and the US. Yields on 5- and 10-year Commonwealth Government bonds in Australia have increased by about 2 and 8 bps since the end of October, while the equivalent tenor US Government bonds have fallen 2 and 4 bps respectively over the same time period.
The combined effects of the current expansionary settings of domestic fiscal policy and monetary policy, plus the ‘natural’ underlying strength of the industrial structure of Australia, means that while we are not out of the woods yet, it seems the economy is now on the upswing, trade tensions with China notwithstanding.