SYDNEY (Reuters) – Australia’s central bank kept interest rates at record lows on Tuesday and promised to keep three-year government bond yields at a target of 0.25% because it was predicted the coronavirus pandemic would trigger a massive economic downturn.
FILE PHOTO: An ibis bird sits next to the Reserve Bank of Australia headquarters in central Sydney, Australia 6 February 2018. REUTERS / Daniel Munoz / Photo File
The Reserve Bank of Australia (RBA) announced on March 19 the cut in interest rates to 0.25% along with an unprecedented stimulus package, which included an unlimited quantitative easing program.
On Tuesday, the council confirmed all elements of the package and said it would not raise interest rates until it made progress in achieving employment and inflation goals.
The decision came when economists predicted the worst recession in Australian history that would see the unemployment rate nearly double to close to 10%. Economic indicators on Tuesday offered impending pain with March job openings posting their biggest decline in more than a decade.
“There is considerable uncertainty about the short-term prospects for the Australian economy,” RBA Governor Philip Lowe said in a brief statement after the meeting.
“Much will depend on the success of the virus prevention effort and how long social distance measures need to stay in place,” Lowe added.
“However, a very large economic contraction is expected to be recorded in the June quarter and the unemployment rate is expected to rise to the highest level in years.”
Restrictions on the movement of people and meetings have forced many businesses in the fields of hospitality, retail, transportation, education, and even community service to be closed. Businesses that remain open face a decline in sales and increasing operational constraints.
There is already growing evidence of a marked decline in activity when the total number of confirmed COVID-19 cases in Australia crept towards 6,000 with 46 deaths.
A closely watched ANZ survey on Tuesday showed total AUJADS = ECI job advertisements fell 10.3% in March from February, the sharpest decline since January 2009 when the global financial crisis raged.
Separately, the service sector index showed activity shrank for four consecutive months in March as it slumped to its lowest level in 11 years.
That’s not all gloomy with another survey from ANZ and Roy Morgan on Tuesday showing consumer sentiment bounced last week after two months of a sharp fall, because the government’s “JobKeeper” plan to subsidize some workers lightened the atmosphere just a little.
In anticipation of a sharp contraction in gross domestic product, the RBA has so far bought A $ 38 billion of Australian government bonds, or nearly 7% of outstanding stock, to help keep borrowing costs low.
It said the function of the bond market had improved since launching a quantitative easing program on March 20 and so there was a possibility that “smaller and less frequent purchases” were needed.
The statement caused a sell-off in long-term bonds, sending 10-year yields upwards of 10-days at 0.951%. Australian dollar AUD = D3 also jumped to one week highs of $ 0.6168.
“The very aggressive rate of buying (bonds) cannot be sustained for long,” said Marcel Thieliant of Capital Economics. “A case can still be made for purchasing corporate bonds because spreads continue to widen.”
Thieliant estimates that the unemployment rate will surge by 12% and underlying inflation will drop below 1% over the next few years.
“To meet its target, the Bank might have to launch negative interest rates at some point even though it does not currently have the desire to do so,” he added.
($ 1 = 1.6359 Australian dollars)
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