Tough times ahead as RBA works to protect Australian economy
Managers have praised the Reserve Bank of Australia’s (RBA’s) efforts but warned the central bank can ‘only do so much’ to stem the tide of the worldwide economic chaos caused by COVID-19.
The central bank announced rates had been cut from 0.5% to 0.25%, a historic low, and could stay at that rate for another three years. It also announced a three-part package of stimulus measures including bond purchases.
David Bassanese, chief economist at BetaShares, said the move to 0.25%, the lowest effective bound for the central bank, left it no option but to resort to quantitative easing.
“The RBA has fired its very last cash rate bullet and must now resort to quantitative easing.
“The RBA can only do so much in the face of virtual self-inflicted depression conditions developing around the world.”
Many remarked on the use of Governor Philip Lowe’s ‘whatever is necessary’ comment, likening it to famous comments made by former European Central Bank president Mario Draghi in July, 2012 when he said he would do ‘whatever it takes’ to preserve the Euro currency.
Stephen Miller, investment strategy consultant at GSFM, said: “In this sense the RBA measures are a welcome and positive step involving as they do innovative approaches to monetary policy through QE [quantitative easing] and the Term Funding Facility. But they may be just another instalment. Only time will tell. I think it is implicit in the RBA’s statement today that they stand ready to do more if needed. They may need to be a little more explicit a la Draghi’s ‘whatever it takes’ at some point.”
He said he expected further significant fiscal support in the future which went beyond the 1% of GDP previously announced.
Kerry Craig, global market strategist at J.P. Morgan Asset Management, said: “While the 25bps rate cut will most likely be passed on to borrowers through the banks in full, that does little to help those needing income in what was an already constrained environment. The forward guidance around the cash rate and bond buying program means that while there may be some capital to be gained in government bonds if yields can be brought back down, yields are going to stay low and remain low for some time.”
However, he praised the RBA for its co-ordinated response with the Government. Prior to Lowe’s Q&A, there was a press conference with Prime Minister Scott Morrison and Treasurer Josh Frydenberg.
“The most important line in the statement today was that the RBA was working with government. Markets are desperate for a co-ordinated approach after too long a period of having the government and the RBA looking at each other for economic support. There should be some reassurance that support is coming in tandem and there is scope to do more on both fiscal and monetary policy if needed.”
“Of course, monetary policy cannot do all the heavy lifting of supporting the economy by itself, and it is highly likely that fiscal policy will be expanded significantly in order to attempt to limit the damage caused by coronavirus containment measures. The Australian Federal and State governments will likely be called upon to announce further stimulatory measures, including greater industry assistance, larger wage subsidies, and cashflow support for households and businesses,” said Anthony Doyle, cross-asset specialist at Fidelity.
AUTHOR
Laura Dew
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