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The RBA’s November Statement on Monetary Policy revealed that Australia has fared better than expected but the recovery is “expected to be bumpy and uneven” and “highly sensitive to further virus outbreaks.”
Although spending is still below levels seen prior to the pandemic, the RBA predicts that Victoria’s emergence from lockdown and policy measures such as quantitative easing will enable further national economic activity in the following quarters.
“After contracting by 4 per cent over 2020 as a whole, GDP is expected to increase by around 5 per cent over 2021 and 4 per cent over 2022,” wrote the RBA in its November statement.
“This would bring GDP back to its end-2019 level by the end of 2021, but leave it well short of the path expected prior to the outbreak of the pandemic.”
Borrowing costs are also at historic lows in both Australia and abroad, which is expected to boost credit to consumers and businesses.
“Supply of debt and equity finance in markets remains ample; although equity markets have been volatile around the US election, the cost of equity remains low and has encouraged considerable equity raising both in Australia and globally,” wrote the RBA.
What are the RBA’s key policy changes this quarter?
On Tuesday, the RBA announced a 0.1 per cent cash rate and promised to buy $100 bn of government bonds over the next six months.
It is unlikely the cash rate will drop any further and it is not expected to rise for at least three years.
“The Board considers that there is little to be gained from short-term interest rates moving into negative territory and continues to view a negative policy rate as extraordinarily unlikely,” wrote the RBA.
The RBA is also engaging in quantitative easing by purchasing $100 bn of Australian bonds to increase inflation and encourage lending.
“The Bank’s monetary policy measures package will support economic activity and job creation through the normal transmission channels. The lower risk-free yield curve will flow through to lower rates for borrowers, thus boosting available cash flows for some people,” wrote the RBA.
“The Bank’s measures to ensure a high level of liquidity in the Australian financial system will also support the supply of credit to households and businesses.”
What do these policy changes mean for businesses?
Steven Dooley, Currency Strategist at Western Union Business Solutions, welcomed the $100 bn bond-buying regime.
“[Quantitative easing] means long term fixed rates should become cheaper. [It is] also likely to boost spending, lift equity markets and lower hurdle rates for business investments.
“The move to lower the cash rate to 0.1 per cent will have an only marginal effect … [I]t will have an impact on the margins, [but] the QE program is more important.”
However Matt Grudnoff, a senior economist at The Australia Institute, notes that there is a distinction between policy that is effective in theory and policy that is effective in practice.
“[Q]uantitative easing adds to the amount of loanable funds making those funds cheaper to borrow. Business borrows more to invest and this stimulates the economy.
“The problem in a recession is that business is reluctant to invest because they’re likely to be struggling to sell their product.
“When you’re worried about cash flow and shifting the product you’re already making, you’re unlikely to be interested in borrowing money to install new capital equipment.”
Mr Grudnoff said that Australia’s economic recovery should mostly be supported by fiscal policy.
“[The cash rate] cut will have little impact on the economy. What it shows is that the RBA thinks that more needs to be done to help stimulate the economy but they have run out of options.
“This means that federal and state governments need to do more with fiscal policy to stimulate the economy.”