Australia’s central bank passed up buying bonds on Thursday last week in its already reduced QE schedule as the rate it targets appears anchored for now. The calm may prove brief as governments at home and abroad start issuing reams of paper to finance their massive fiscal stimulus.
The Reserve Bank is expected to maintain its three-year yield target at 0.25% and the cash rate at the same level Tuesday. Governor Philip Lowe’s post-meeting statement is likely to hint at the economic scenarios to be outlined in Friday’s quarterly forecast update.
“The path ahead remains unclear, and depends on containment of the virus threat, so there is unlikely to be any major shift in policy yet,” said James McIntyre, Australia economist at Bloomberg Economics. “While there are early signs of success in the bond market, the real challenge lies ahead as fiscal responses drive a surge in bond issuance over the course of 2020 and beyond.”
The RBA skipped purchasing bonds in the secondary market on Thursday, the first time since announcing its version of yield curve control six weeks ago, having acquired about A$50 billion ($32.3 billion) of federal and state government securities across a range of maturities. Its buying spree has seen yields on three-year Australian government bonds converging with the target.
Governments worldwide have deployed more than $8 trillion to fight the economic fallout from the coronavirus pandemic. In the months and years ahead, nations are going to flood bond markets to raise the cash necessary to finance those programs.
Data reflecting the virus impact are starting to trickle through. In Australia, consumer and business confidence have tumbled and early unemployment indicators suggest it could have breached 10% already. Nearly one-in-three Australians surveyed said their financial position had worsened between mid-March and Mid-April.
That was reinforced Monday with a private report showing job advertisements plummeted 53.1% in April and a government survey that almost three-quarters of firms said they expect reduced cash flow to have an adverse impact on business over the next two months.
Yet on a global level, Australia’s geographic isolation and early measures to contain the virus have paid dividends. It’s ahead of many countries on flattening the pandemic curve, which has investors growing more confident on the outlook Down Under.
As always, Lowe will carefully choose his words on Tuesday. He set currency hares running last month when he said in the April policy statement that “smaller and less frequent purchases of government bonds” may be possible if conditions improve. The Australian dollar has surged about 5% since.
(Updates with plunging job ads, cash-flow concerns in seventh paragraph.)
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