RBA holds rate, sees economy contracting

Prashant Mehra
(Australian Associated Press)

 

The Reserve Bank of Australia has kept the cash rate at a record low 0.25 per cent at its monthly board meeting as it assesses the impact of recent measures to stimulate the economy.

Economists had widely expected the central bank to hold the benchmark rate at the current level following two rate cuts as well as quantitative easing measures in March in an effort to cushion the economic impact of the coronavirus crisis.

Governor Philip Lowe on Tuesday said the RBA board had decided to maintain the current policy settings, including the targets for the cash rate and the 25-basis point yield on three-year Australian government bonds.

He said bond purchases by the central bank had so far totalled about $50 billion and while this had been scaled back for now, the RBA was prepared to scale up these purchases again and do whatever was necessary to ensure bond markets remained functional and three-year AGS yields stayed at 25 basis points.

He reiterated that the board would not increase the cash rate target until progress was made towards full employment and it was confident that inflation would be sustained within the 2.0 per cent to 3.0 per cent target band.

Mr Lowe said the Australian economy was going through a very difficult period and there was considerable uncertainty about the outlook.

The RBA board has considered a range of scenarios, with economic output falling by about 10 per cent during the first half of 2020 and by about 6.0 per cent over the year, in the most likely scenario. This will be followed by a bounce-back of 6.0 per cent next year.

Under this scenario, the central bank also expects the unemployment rate to peak about 10 per cent in coming months and stay above 7.0 per cent at the end of next year.

A stronger economic recovery was possible if there was further substantial progress in containing the coronavirus in the near term and a faster return to normal economic activity, Mr Lowe said.

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