Australia central bank holds rates, but easing expected soon

SYDNEY (Reuters) - Australia’s central bank held its cash rate at a record low on Tuesday but hinted at further monetary easing as it looks to create jobs in the coronavirus-ravaged economy, which is suffering its worst contraction since the Great Depression.

FILE PHOTO: Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz

The Reserve Bank of Australia (RBA) kept the rate steady at an all-time low of 0.25%, as widely expected in a Reuters poll. It also affirmed its target for three-year bonds and the recently increased cheap funding program for lenders, but signalled it was considering other measures to boost activity.

“The Board views addressing the high rate of unemployment as an important national priority,” RBA Governor Philip Lowe said in a statement announcing the outcome of the policy meeting.

“The Board continues to consider how additional monetary easing could support jobs as the economy opens up further.”

ANZ Bank said the language suggested an RBA cut was imminent and changed its forecast after the statement to expect the cash rate will be reduced to 0.1% next month.

With Westpac and National Australia Bank, three of Australia’s “big four” banks now expect a November cut.

The RBA decision comes before the government is due to release its budget for 2020/21, where it is expected to announce a record deficit of around A$200 billion ($143.10 billion) as it boosts spending and welfare.

Westpac chief economist Bill Evans said the focus on the labour market showed the RBA’s concern about the risk of a sustained period of joblessness.

He said this backed his view that the cash rate and three-year target bond rate would be cut to 0.1 percent next month, with the RBA also expected to commit to buying bonds with maturities of 5-10 years.

“From our perspective, there is considerable encouragement that the (RBA) Board plans to move next month having given the federal government clear air to sell its budget tonight,” Evans said.

The statement briefly lifted the Australian dollar but it had dropped 0.5% to $0.7150 by evening on the expectation of further easing. Australian government bonds recouped early losses after the RBA meeting.

Lowe said public sector balance sheets were “in good shape”, which meant there was capacity for the government to fund the extra support expected in the budget.

“Both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment,” he said.

Reporting by Swati Pandey and John Mair. Additional reporting by Tom Westbrook; Editing by Ana Nicolaci da Costa