4 Nov 2020
RBA Stimulus
Despite recent economic data looking better than previously expected, the RBA remain very concerned about the medium term outlook - specifically regarding unemployment, and more so underemployment, and inflation remaining below their target.
As a result, at its November meeting, the RBA announced a package of stimulus measures that include both immediate action and quite explicit forward guidance regarding their intentions over the medium term. The RBA’s clear intentions are three-pronged:
- To lower borrowing rates for the government (both Federal and State) and the financial system, specifically banks
- To provide additional liquidity and encourage the financial system to lend (ie. credit growth)
- To put a lid or cap on Australian dollar strength to ensure a rising currency doesn’t hurt the economic recovery
This was their first significant policy change since March and also the first time the RBA has initiated traditional quantitative easing (QE). The measures include:
- A reduction in the RBA Cash Rate from 0.25% to 0.10%, to encourage banks to lower their loan rates
- A reduction in the 3 year Australian government bond yield target to 0.10% (which the RBA fixes through their market operations, ie. buying these bonds)
- The introduction of traditional Quantitative Easing – that is, money printing to fund government bond purchases - with their intention to buy $100 billion of bonds with 5-10 year maturities over the next 6 months, to lower medium to longer term borrowing costs
The RBA also gave fairly explicit forward guidance regarding their Cash Rate intentions. They will not be increasing the Cash Rate until actual inflation is sustainably within their target range of 2-3%, which means we need to see significantly higher wage growth from here.
Considering the RBA’s unemployment outlook, the 0.10% Cash Rate will be in place for at least 3 years, but probably closer to 4-5 years.
The RBA also remained firm and clear that they have plenty of stimulus ammunition remaining.
What does this all mean for businesses, households, and markets?
The clear intention is to both lower borrowing costs and encourage banks to lend to businesses and household to stoke investment which will ultimately lead to declining unemployment and asset price inflation (ie. higher equity markets and property prices).
They also want to ensure the financial system is awash with liquidity to both provide comfort and support whilst also “encouraging” (forcing) participants to take more risks to help lower unemployment and support economic growth. They want governments to be able to run larger budget deficits without having to worry about their ability to borrow and borrowing costs.
Lastly, they want to ensure the Australian dollar doesn’t surge from here, given already upward pressure from commodity prices, so that the economy can be supported by an export-led recovery.
We see this is as broadly positive for growth assets – equities, property and infrastructure.
It doesn’t mean taking unchecked and unnecessary risks, but it does mean that there is strong support for those asset classes as cash and bond yields are driven to zero.
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser.
