Dr Brendan Rynne, KPMG Chief Economist, comments on today’s RBA announcement

While the impact of this reduction is likely to be minimal from a borrowing cost perspective, it does reinforce the point made by Governor Lowe that the RBA will use every tool at its disposal to assist in achieving economic growth and pushing the nation back towards full employment.

KPMG expects that – also consistent with Governor Lowe’s recent speech – the RBA will start to buy 5- and 10-year bonds directly from Commonwealth Government in order to make the AUD more internationally competitive, which will again assist with the driving up aggregate demand, and therefore jobs, in Australia. This is as much a defensive move as other major central banks are already playing this game.

It is clear the RBA has adopted a more aggressive policy stance than its (historically) conservative approach.  The pushing down of the cash rate to its bare bones; the application of QE for the first time during the pandemic; the changing of the policy rules surrounding inflation targeting; and the increased dialogue with the market around signalling future policy moves are collective actions that Australia’s monetary authority has not seen necessary to use previously in its attempts to help our nation recover from economic shocks.

A word of caution however.

Recent history tells us that loosening the monetary flood gates tends to create asset price inflation (in bonds, stocks and physical assets like housing), but not general price inflation (as measured by the CPI).  But that history has been written when global supply chains have continued to operate normally, and the world was not in the midst of a 1-in-100-year pandemic – meaning the supply of goods and services to households was still functioning normally.

We know that in today’s coronavirus world, global supply chains are being disrupted at the same time as substantially more cash is floating around the economic system; these are the core elements needed to stoke the general price inflation fire.  So while long-term signalling from the RBA that the cash rate will not be increased for the next 3 years is a stabilising and economically enhancing measure in ‘normal’ circumstances, our world at the moment is anything but normal.

All this means is that the RBA needs to keep a close watch on price signals in the economy. Running loose monetary policy seems necessary at the moment and inflation risk seems to be an artefact of a bygone era but the old inflation genie is in the bottle and letting it out to run wild is a risk worth watching carefully.

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