Australian Markets Weekly: RBA’s policy rule points to benefit of further policy stimulus
The Weekly analyses the RBA’s macro-econometric model.
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- The Reserve Bank has effectively exhausted conventional monetary policy by cutting the cash rate to its self-imposed floor of 0.25% and adopting unconventional measures on a greater scale than during the global financial crisis. Using the policy rule from the bank’s own macro-econometric model, we find policy was too tight in recent years given inflation undershot the 2-3% target band and unemployment exceeded the NAIRU.
- Using the bank’s latest economic forecasts – which incorporate the government’s fiscal stimulus – the same policy rule points to negative interest rates. Some of this has been achieved by already-implemented unconventional policies, which we estimate are doing the work of a moderately negative cash rate of -1%.
- The outlook remains highly uncertain, but the rule still points to the benefit of further stimulus, which the government is better placed to deliver than the Reserve Bank. In the near term this can be achieved by avoiding the abrupt withdrawal of government support to the labour market when the JobKeeper subsidy and the temporary JobSeeker payment are legislated to end in September. The government will announce its decision on the matter in its 23 July economic and fiscal update, but the treasurer has already suggested that the wage subsidy will continue, albeit in a more targeted form.
The week ahead – AU RBA & payrolls, NZ ANZ business survey; CH PMIs; US payrolls & Fed
- Australia: RBA Deputy Governor Debelle speaks on the Reserve Bank’s policy actions and balance sheet on Tuesday. He is likely to recount the success to date in meeting the RBA’s target for the 3-year bond and restoring market liquidity. He could also discuss technical aspects of the bank’s QE programme. ABS payrolls on Tuesday should show how the labour market improved into mid June as health restrictions were eased. Building approvals on Wednesday should show approvals fell sharply in May. Trade data on Thursday should show the trade surplus shrank by $2b to $6.6b. NZ: The sense of recovery in NZ will be severely dented if Tuesday’s full and final ANZ business survey for June doesn’t improve on the preliminary reading. Also watch for housing, credit, and international trade data through the week, along with the new employment indicators running the course of May.
- CH: The official PMIs are on Tuesday and the Caixin versions are on Wednesday and Friday. The market expects little change in both the manufacturing and non-manufacturing PMIs. US: Renewed infections may dominate the economic data. Thursday sees non-farm payrolls and the manufacturing ISM. Payrolls should show another improvement, up 3 million, but with unemployment remaining high at 12.3%. Wednesday’s FOMC minutes should echo economic forecasts released two weeks ago. Fed Chair Powell testifies to the House Financial Panel on Wednesday.
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