Reserve Bank keeps official interest rates on hold at 0.25pc

The RBA all but flagged a coming recession as it kept the official cash rate on hold at 0.25 per cent.

A pedestrian walks past the Reserve Bank of Australia building in Sydney. Picture: AAP

The Reserve Bank has left the official cash rate unchanged after its monthly board meeting, but RBA Governor Philip Lowe went about as close as a central bank will ever go to predicting a recession due to the coronavirus pandemic.

As widely expected by market economists, the RBA left the official cash rate at a record low of 0.25 per cent.

The decision came after the RBA cut the official cash rate by 50 basis points at an emergency meeting two weeks ago, when it warned that the coronavirus pandemic was having a major impact on the economy and financial system.

The central bank also maintained its target of 0.25 per cent for the three-year Australian government bond yield which was introduced at the March meeting, along with a term funding facility for the banking system, focusing on support for credit to small and medium-sized enterprises, as well as guidance that it wouldn’t lift the cash rate until progress was being made towards full employment and the bank confident that inflation would be sustainably within the 2-3 per cent target band.

In his monetary policy statement, RBA governor Philip Lowe said although much would depend on the success of efforts to contain the virus there was “considerable uncertainty about the near-term outlook for the Australian economy”.

“A very large economic contraction is, however, expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years.”

Dr Lowe however gave no indication as to whether he also expected a March quarter contraction due to the combined impact of the bushfire crisis and the pandemic.

He has also avoided making any prediction for the September quarter, thereby staying clear of whether or not this downturn would meet the standard two-quarter definition of a recession.

“The coordinated monetary and fiscal response, together with complementary measures taken by Australia’s banks, will soften the expected contraction and help ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed”. The Australian financial system was “resilient”, as well as “well capitalised and in a strong liquidity position”, with “financial buffers available to be drawn down if required”, he said.

Dr Lowe added that the “comprehensive policy package” (monetary and fiscal) announced last month would also support the expected recovery.

Dr Lowe noted that markets were “working more effectively than they were a few weeks ago”, partly reflecting “substantial measures undertaken by central banks”.

He added that “the bank will continue to promote the smooth functioning of these important markets (state and federal bonds)”.

But “if conditions if conditions continue to improve, though, it is likely that smaller and less frequent purchases of government bonds will be required,” Dr Lowe said.

The Australian dollar rose from US61.2c to a four-day high of US61.48c in response to the commentary.

The RBA has also flagged smaller liquidity additions via its daily open market operations.

“Given the substantial liquidity that is already in the system and the commencement of the Term Funding Facility, the daily open market operations are likely to be on a smaller scale in the near term. Operations at longer terms will continue, but the frequency of these operations will be adjusted as necessary according to market conditions,” Dr Lowe said.