RBA expected to stick to the YCC plan – UOB

Economist at UOB Group Lee Sue Ann assessed the latest RBA event and its prospects for the next meetings.

Key Quotes

“The Reserve Bank of Australia (RBA) decided to maintain its current policy settings in July, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points.”

“The Australian economy saw its first recession in 29 years, given the impact from the bushfires and the COVID-19 pandemic. GDP contracted by 0.3% q/q in 1Q20, from the 0.5% q/q expansion in 4Q19. The annualized rise in 1Q20 GDP was 1.4% y/y, coming in within expectations, following the 2.2% y/y reading in 4Q19. Growth in 2Q20 is expected to be far worse, and we are likely to see a much more significant fall in household consumption with movement restrictions in place for a larger portion of the quarter despite the recent easing of measures.”

“As such, we have revised lower, in our 3Q20 quarterly update, our GDP forecasts for 2Q20 to -7.8% y/y, followed by contractions of -6.9% y/y in 3Q20 and -4.8% y/y in 4Q20. This brings our full-year 2020 GDP forecast to -4.5%, compared to -1.8% previously forecasted in our 2Q20 quarterly update.”

“The RBA has effectively exhausted conventional monetary policy by cutting the OCR to its self-imposed floor of 0.25%. Hence, we do not see further reductions in the policy rate, with negative rates ruled out by RBA Governor Phillip Lowe (for now). The focus will remain firmly on end-user rates via the yield curve target, as well as ensuring sufficient liquidity in bond markets and the free flow of credit to households and business.”