Coronavirus: RBA says no guarantees on quick economic rebound

Billions in handouts might not work and hopes of a sharp September rebound may be optimistic, the RBA’s board has heard.

Reserve Bank of Australia governor Dr Philip Lowe speaks to the media in Sydney in March. Picture: AAP

Billions of dollars of cash handouts to bolster the economy might not work, and hopes of a sharp economic rebound in September once the coronavirus passes might prove optimistic, the Reserve Bank of Australia’s Board has heard.

In its first meeting since launching an unprecedented quantitative easing program and ultra-cheap loans to banks, the RBA Board said it expected lockdown measures to remain in place for “at least a couple of months in most countries”.

“GDP could fall significantly in the June quarter and remain subdued in the September quarter,” the minutes of the April board meeting, released on Tuesday, said.

Economist are expecting the biggest quarterly economic contraction on record in the second quarter of this year, as activity plunges in the wake of measures to curb the spread of the coronavirus.

In a meeting conducted by videoconference, the nine board members also raised questions about the effectiveness of $750 cash payments to households on welfare that were announced by the federal government in its first round of stimulus in March.

“It was unlikely that these policies would provide a strong boost to spending in the near term given the broadening shutdown of non-essential activities and the restrictions placed on household activities,” the board noted in its minutes.

In an emergency mid-month meeting in March the Reserve Bank cut the cash rate to 0.25 per cent, announced a $90bn line of credit to banks, and undertook to keep the yield on three year government bonds at 0.25 per cent by purchasing however many government bonds it needed to.

“The board confirmed that the target for three-year yields would be maintained until progress was made towards the bank’s goals of full employment and the inflation target, and that it would be appropriate to remove the yield target before the cash rate itself was raised,” the minutes said.

RBA governor Philip Lowe will give a speech on Tuesday afternoon, and is expected to reveal more detail on the bank’s outlook for the economy and measures to bolster growth.

Inflation has remained below the Reserve Banks medium term targe of 2 to 3 per cent for years, and the jobless rate is expected to surge to 10 per cent in coming months – more than double the bank’s estimate for full-employment.

The board was confident the financial system, thanks to post-financial crisis reforms, would withstand the economic downturn created by the coronavirus and government policy to shut parts of the economy down. “Rather than being a source of the shock, the financial system was well placed to mitigate the impact of the pandemic,” the minutes said.

The board noted the impact of RBA measures to support banks, which had “had reduced interest rates for small business borrowers markedly, and small business customers affected by the COVID-19 outbreak would be able to defer interest and loan payments for six months”.

“While most lenders did not reduce their standard variable rates following the further cut in the cash rate on 19 March, they had announced a reduction for interest rates on fixed rate loans and measures to defer interest and loan payments for distressed households,” the minutes said.

In keeping with policies of central banks abroad the Reserve Bank has purchased more than $45bn in government bonds since announcing a quantitative easing program in March. “Purchases of government bonds had been scaled up significantly … central bank balance sheets had expanded rapidly in March,” the minutes said.

“GDP was projected to contract by at least 10 per cent in the United States, the euro area and China over a couple of quarters. The contractions in some of Australia’s other trading partners, particularly in Asia, were likely to be smaller, but still significant,” they added.