Interest Rates

Fed chair Jay Powell had a message late last week for Australia, the US (of course), and the rest of the world about the battle to control the coronavirus and emerge with the economy in good shape.

The worsening situation in Victoria was obvious to see in the post-meeting statement from Reserve Bank governor, Phil Lowe which revealed a higher estimate of unemployment than before from the central bank and concerns about the wider impact of events down south.

While the Federal government decided to keep JobKeeper and JobSeeker but start tapering it later in the year, Reserve Bank governor Philip Lowe yesterday warned the unemployment rate will climb further this year as the coronavirus pandemic continues to impact activity – especially in Victoria and NSW.

While the Australian economy is doing better than originally feared in the face of the coronavirus pandemic a senior Reserve Bank official has warned government fiscal and RBA monetary policy (interest rate) help will be needed for years.

The Reserve Bank of NZ has left its official cash rate at 0.25 percent, but like all other central banks around the world, it remains uncertain about the future and whether the current level of stimulus is enough.

The release yesterday of the Reserve Bank’s June board meeting minutes a fortnight ago did not change thinking on the outlook for the economy – it’s still tough, interest rates will remain low and unemployment is the biggest problem, even though it may not quite be the same concern as it was when the lockdowns started in March.

No movement in the cash rate of 0.25% from the Reserve Bank’s June meeting yesterday as the bank also continues to target the three-year bond rate at 0.25%.

The economy is front and centre this week in Australia with the monthly Reserve Bank meeting tomorrow, the March quarter national accounts and GDP figures on Wednesday and a string of important data releases for April and May.

The Reserve Bank of New Zealand has boosted its major support package by 90% to $NZ60 billion while both keeping the Official Cash Rate steady at 0.25%, and suggesting that it could be cut further.

No change in interest rates from the Reserve Bank – an expected outcome from the May meeting yesterday but we got more bad news about the damage being done to the economy by the COVID-19 related lockdowns.

Looking at the data released this week, you can understand why the Bank of Japan moved to an even easier monetary policy stance at its truncated one-day meeting on Monday.

The March quarter’s Consumer Price Index gave us a hint of what might have been had the COVID-19 pandemic not hit, but the data also confirmed that apart from government-driven charges for tobacco and alcohol costs and private health care, the 0.3% quarter on quarter and 2.2% annual reading would have been much lower.

While the BOJ kept its interest rate targets unchanged, as had been widely expected, it pledged to buy an unlimited amount of bonds to keep borrowing costs low as the Abe government tries belatedly to spend its way out of the deepening economic pain from the coronavirus pandemic.

Reserve Bank governor Philip Lowe has given the strongest (and gloomiest) forecasts for the looming hit to Australian economic activity from the COVID-19 pandemic and measures governments have taken to control its spread.

As expected China cut its key loan prime rates (LPR) on Monday but that that still leaves the rates the highest among major economies.

The People’s Bank of China (PBOC) said it was lowering the one-year medium-term lending facility (MLF) loans to financial institutions to 2.95%, the lowest since the liquidity tool was introduced in September 2014, down 20 basis points from 3.15% previously.

The Reserve Bank has warned that the Australian economy faces a “very large economic contraction” in the current June quarter.

Tomorrow’s Reserve Bank board meeting looks anti-climatic. The central bank will be looking for a rest after its busy March when it cut the cash rate to a record low of 0.25% and put in place a series of supports for the financial system to allow it to flex as pressure from the COVID-19 pandemic started slamming into it.

The National Australia Bank now sees the Reserve Bank cutting rates to 0.25% and adopting a number of unconventional monetary policy tools to battle the impact of the rapid coronavirus-driven deterioration in both the local and global economies.

Unless the impact of the bushfires, the coronavirus crisis in China and the general weakness in consumer spending look like they are dragging the economy lower, don’t expect any rate cuts from the Reserve Bank this year.