RBA's focus is on jobs: CommSec's Craig James

RBA's focus is on jobs: CommSec's Craig James
Craig JamesDecember 7, 2020


The Reserve Bank (RBA) maintained its targets for the cash rate and 3-year government bond yield at 0.25 per cent (quarter of a per cent or 25 basis points). The Reserve Bank left the door open to further easing.

What has changed since the last Board meeting on September 1?

After slipping by 0.3 per cent in the March quarter, the Australian economy contracted by 7.0 per cent in the June quarter (survey -6 per cent). It was the biggest quarterly decline in output since quarterly records began in 1959.

The NAB business confidence index improved from -8.2 points to -3.8 points in September. The business conditions index improved from -6.2 points to an 8-month high of +0.4 points.

The US President and First Lady both tested positive for the COVID-19 virus.

Employment rose by 111,000 in August (survey forecast: -35,000). The unemployment rate fell from a 22-year high of 7.5 per cent to 6.8 per cent in August (survey forecast: 7.7 per cent). It was the biggest monthly fall in the jobless rate in 32 years (July 1988).

The US Federal Reserve left the target range for the federal funds rate between zero and 0.25 per cent. All but four policymakers expect rates to remain near zero through to 2023. The Fed will target an inflation rate a little above 2 per cent.

Retail trade fell by 4 per cent in August after rising by 3.2 per cent in July. Retail trade is up 7.1 per cent over the year.

The CoreLogic Home Value Index of national home prices fell by just 0.1 per cent in September. Prices were up 4.8 per cent over the year.

Private sector credit (effectively outstanding loans) was broadly unchanged in August (survey: -0.1 per cent) to be up 2.2 per cent on the year – the slowest annual growth rate in over 10 years.

Total household wealth rose by 1.5 per cent to $11,131.8 billion in the June quarter, a partial reversal of the 2.5 per cent fall in the March quarter.

The Aussie dollar has eased from US74 cents to US70-72 cents.

The assessment

The Reserve Bank has left the door open to more stimulus. But at present there is no reason to be contemplating options. The Reserve Bank may consider further ‘monetary easing’ but that may not mean more rate cuts, rather bond purchases.

Perspectives on interest rates

The Reserve Bank has left the cash rate at a record low of 0.25 per cent after previously cutting rates on March 3 and March 19, 2020, each by 25 basis points. There have been 17 rate cuts since November 2011 with the cash rate cut from 4.75 per cent. Previously rates rose seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.

What are the implications of today’s decision?

Interest rates will remain at record low levels until at least 2023. That is the good news for the business sector and home buyers. People can go about their lives and not have to worry about rates rising or falling.

The Federal Budget is handed down in a few hours’ time. The intention is to create and maintain jobs, and that is better achieved by fiscal measures rather than monetary policy. The Reserve Bank noted that ‘addressing the high rate of unemployment’ was a ‘national priority.’

There are actually two key factors that will influence economic recovery: jobs and confidence. And the best way the Reserve Bank can boost confidence is to leave interest rate settings unchanged. Consumers must have confidence to spend and business must have confidence to employ, spend and invest.

If the job market was to weaken markedly, the Reserve Bank could certainly contemplate a modest rate cut from 25 basis points to 10 basis points. Or increase government bond purchases. Discussion about negative interest rates would probably return as well. But it is clear that the Bank now can only do so much – stimulus is more a matter for federal, state and territory governments.

And of course, success at achieving solid economic recovery is to a large extent out of policymaker hands. It’s all about ‘flattening the curve’, virus treatments and vaccines.

Craig James, Chief Economist, CommSec

Craig James

Craig James is the Chief Economist at CommSec, interpreting ‘big picture’ economic and financial trends.

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