Statement by Philip Lowe, Governor: Monetary Policy Decision - May 2020 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2020-05-05

Media Release
Statement by Philip Lowe, Governor: Monetary Policy Decision
5 May 2020
At its meeting today, the Board decided to maintain the current policy settings, including the targets
for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points.
The global economy is experiencing a severe downturn as countries seek to contain the coronavirus. Many
people have lost their jobs and a sharp rise in unemployment is occurring. At the same time, the
containment measures have reduced infection rates in a number of countries. If this continues, a
recovery in the global economy will start later this year, supported by both the large fiscal packages
and the significant easing in monetary policies.
Globally, financial markets are working more effectively than they were a month ago, although
conditions have not completely normalised. This improvement reflects both the decline in infection rates
and the substantial measures undertaken by central banks and fiscal authorities. Credit markets have
progressively opened to more firms and long-term bond rates remain at historically low levels.
In Australia, the functioning of the government bond markets has improved and the yield on 3-year
Australian Government Securities (AGS) is at the target of around 25 basis points. Given these
developments, the Bank has scaled back the size and frequency of bond purchases, which to date have
totalled around $50 billion. The Bank is prepared to scale-up these purchases again and will do
whatever is necessary to ensure bond markets remain functional and to achieve the yield target for
3-year AGS. The target will remain in place until progress is being made towards the goals for full
employment and inflation.
The Bank's daily open market operations are continuing to support credit and maintain low funding
costs in the economy. To assist with the smooth functioning of Australia's capital markets, the
Bank has decided to broaden the range of eligible collateral for these operations to include Australian
dollar securities issued by non-bank corporations with an investment grade credit rating. More details
are provided in the accompanying market notice.
The Australian economy is going through a very difficult period and there is considerable uncertainty
about the outlook. Reflecting this uncertainty, the Board considered a range of scenarios at its
meeting. In the baseline scenario, output falls by around 10 per cent over the first half of
2020 and by around 6 per cent over the year as a whole. This is followed by a bounce-back of
6 per cent next year.
There has been a substantial, coordinated and unprecedented fiscal and monetary response in Australia
to the coronavirus. Without this response, the outlook would have been even more challenging. These
policies are supporting the economy right now and will help when the recovery comes. They are supporting
people's incomes, maintaining the important connections between businesses and their employees,
underpinning the supply of credit to businesses and households, and keeping borrowing costs low. The
deferral of loan and other payments is helping people manage their cash flows. The Australian banking
system, with its strong buffers of capital and liquidity, is also helping the economy traverse this
difficult period.
In the baseline scenario considered by the Board, the unemployment rate peaks at around
10 per cent over coming months and is still above 7 per cent at the end of next
year. A lower unemployment rate than this is possible if the reduction in labour demand is accompanied
by a larger reduction in average hours worked, rather than by people losing their jobs.
The Board also considered other scenarios. A stronger economic recovery is possible if there is further
substantial progress in containing the coronavirus in the near term and there is a faster return to
normal economic activity. On the other hand, if the lifting of restrictions is delayed or the
restrictions need to be reimposed or household and business confidence remains low, the outcomes would
be even more challenging than those in the baseline scenario. These scenarios will be discussed in the
Statement on Monetary Policy
, to be released later this week.
In the various scenarios considered by the Board, inflation remains below 2 per cent over the
next few years. In the March quarter just passed, CPI inflation rose to 2.2 per cent, but it
is expected to turn negative temporarily in the June quarter, due to falls in oil prices, the
introduction of free child care and deferrals of various price increases. Further out, in the baseline
scenario inflation is 1 to 1½ per cent in 2021 and gradually picks up further from
Given this outlook, the Bank will maintain its efforts to keep funding costs low in Australia and
credit available to households and businesses. The Board is committed to do what it can to support jobs,
incomes and businesses during this difficult period and to make sure that Australia is well placed for
the expected recovery. The Board will not increase the cash rate target until progress is being made
towards full employment and it is confident that inflation will be sustainably within the
2–3 per cent target band.