Australian Markets Weekly: RBA to soon undertake yield curve control, reinforcing fiscal stimulus

NAB continues to expect the RBA to cut the cash rate to 0.25% in April.

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Download the report for the full picture:  Australian Markets Weekly 9 March 2020

Analysis

  • NAB continues to expect the RBA to cut the cash rate to 0.25% in April and is now forecasting that the RBA adopts unconventional policy by May or June to help the economy deal with fall-out from the coronavirus outbreak.
  • NAB expects the RBA to implement “yield curve control”.  This is a form of quantitative easing, where the central bank sets target levels for government bond yields and buys bonds if yields fail to settle at the targets.
  • The economy will recover as the outbreak comes under control, hopefully by the end of this year, if not sooner, but until then both easier monetary and fiscal policy have a critical role in providing support until the crisis abates.

The week ahead – AU fiscal stimulus & NAB business survey; RBNZ speech; COVID-19

  • The Commonwealth is set to announce its stimulus package this week to counteract the economic impact of COVID-19. Reports suggest the measures include: (1) wages subsidies to prevent job losses; (2) cash injections and tax breaks to help businesses’ cash flow; and (3) an investment allowance to encourage capital expenditure. On Tuesday the February NAB business survey will provide an early gauge of COVID-19 impacts on business conditions. Home loan data on Wednesday should see a further rise in owner-occupier loan approvals. Deputy Governor Debelle speaks on Wednesday.
  • Wednesday’s electronic card transactions and Friday’s PMI will give early clues to COVID-19 impacts. RBNZ Governor Orr’s Tuesday speech on unconventional policy tools is linked to a long-signalled policy paper on this issue, rather than a direct response to the recent economic and financial turmoil.
  • In China, the focus remains on the pace of recovery in production. In the US, confidence measures will be important to track for COVID-19 impacts.  Thursday’s ECB meeting has markets pricing another 10bp cut to the deposit rate to 0.6%, likely with TLTROs to enhance the availability of bank finance. Markets will also look for fiscal support, especially from Germany. Wednesday’s UK budget was intended to be expansionary even before the COVID-19 outbreak. Wednesday’s January GDP, industrial production and trade reports will be worth a look to gauge the health of the economy prior to COVID-19.

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