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RBA holds rate, outlook remains uncertain

Prashant Mehra
The Reserve Bank of Australia has held the cash rate at 0.25 per cent

The Reserve Bank of Australia has kept the cash rate at a record low 0.25 per cent at its monthly board meeting as it assesses the extent of recovery after the coronavirus-driven economic downturn.

Economists had widely expected the central bank to hold the benchmark rate at the current level.

The RBA cut rates twice and announced quantitative easing measures in March in an effort to cushion the economy from the impact of the coronavirus pandemic.

Governor Philip Lowe on Tuesday said the RBA board had decided to maintain the current policy settings, including the targets for the cash rate and the 25-basis point yield on three-year Australian government bonds.

He noted conditions in financial markets have improved, with volatility declining and large raisings of both debt and equity.

Australia's government bond markets were operating effectively and the central bank has not had to purchase government bonds for quite some time, he said.

The RBA was prepared to scale up purchases again and do whatever was necessary to ensure bond markets remained functional and the three-year AGS yields stayed at current levels, he reiterated.

The RBA board pledged not to increase the cash rate target until progress was made towards full employment and it is confident inflation would be sustainably within the 2.0 per cent to 3.0 per cent target band.

The governor was more upbeat on the economic impact of the coronavirus, saying conditions have stabilised recently and the downturn has been less severe than earlier expected.

"Leading indicators have generally picked up recently, suggesting the worst of the global economic contraction has now passed," Mr Lowe said.

He noted that the decline in total hours worked in Australia was considerably smaller than in April and there had also been a pick-up in retail spending in response to the decline in infections and the easing of restrictions in most of the country.

But was also careful to emphasise that there has been no change in uncertainty.

"Despite this, the outlook remains uncertain and the recovery is expected to be bumpy and will depend upon containment of the coronavirus," Mr Lowe said.

The governor noted that an unprecedented 800,000 people have lost employment since March, with many others retaining their job only because of government and other support programs.

The substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period, he said, adding that fiscal and monetary support will be required for some time.

"The RBA has given no signs of any willingness to take further action to support growth, with the focus now on fiscal policy to manage the recovery," HSBC Australia Chief Economist Paul Bloxham said.

The federal government will set out plans at its July 23 mini-Budget statement on whether or not it will continue fiscal stimulus through schemes like the Jobkeeper wage subsidy.

Economists now expect the central bank to reassess its economic outlook and forecasts in its Statement on Monetary Policy in August.