The Reserve Bank of Australia (RBA) interest rate decision was exactly inline with what the market was expecting, but this doesn’t mean it didn’t offer any surprises.
Our central bankers kept interest rates steady at a record low of 0.25% this afternoon for the fifth straight month.
This is exactly what economists were predicting as the RBA indicated before that the rates are effectively at rock bottom.
ASX stocks unmoved
The S&P/ASX 200 Index (Index:^AXJO) was unmoved by the news as it traded 1.9% higher at the time of writing, while the Australian dollar firmed slightly to US71.3 cents.
Some traders had speculated that the RBA could go to zero or even turn to negative rates in the face of the latest stage four COVID-19 lockdown in Victoria. But this was unlikely.
However, there are four interesting takeaways from RBA Governor Philip Lowe’s statement that accompanied the rate decision.
RBA will buy bonds tomorrow
The one that stands out to me is the RBA signalling it will be jumping back into the secondary bond market.
The central bank hasn’t been intervening in the government bond market for a while, but it said it will do so tomorrow as the three-year sovereign bond yield is creeping above its 0.25% target rate.
The RBA seldom telecasts its intentions so specifically and the move is likely aimed at getting the yield down without having to lift a finger.
Low government bond yields will depress borrowing costs in Australia as all debt is benchmarked to government bonds.
Banks borrowing more from the RBA
The second noteworthy takeaway is that authorised deposit-taking institutions (ADIs), namely the banks, have been increasingly tapping the RBA for cash.
These ADIs have taken $29 billion from the RBA’s Term Funding Facility, up from $15 billion a month ago. The facility was set up to give banks cheap excess to funds that can be loaned out to consumers and businesses.
The RBA expects banks to increasingly use the funding facility, which should help alleviate margin pressure on the likes of Commonwealth Bank of Australia (ASX: CBA) and friends as we head into the profit reporting season.
Missing the mark
The third point of interest is that the RBA has effectively given up on trying to get inflation to return to its target band of between 2% and 3% for the next few years.
While the RBA believes that the worst of the COVID-19 fallout is behind us, the weak economic outlook will cap price rises for at least a couple of years – even in the bank’s bull case scenario.
What this means is that the RBA won’t be looking to lift interest rates for a long while as it acknowledged that our economy will need support for years.
Finally, the RBA is expecting the unemployment rate will peak at 10% in 2020 as output falls by 6% before growing by 5% in 2021.
However, it will take a few years before the unemployment rate “gradually” falls to 7%. It’s a pretty bleak outlook.
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