Australia central bank leaves interest rates unchanged

Sydney

AUSTRALIA'S central bank kept its interest rate and yield objectives unchanged as an abatement of the health crisis allows the economy to begin reopening.

Reserve Bank of Australia Governor Philip Lowe maintained both the cash rate and three-year yield targets at 0.25 per cent on Tuesday, as expected. The bank sharply tapered bond buying in May as financial markets calmed and Covid-19 infections dwindled. Meantime, a gauge of consumer confidence advanced on Tuesday for a ninth straight week.

"It is possible that the depth of the downturn will be less than earlier expected," Mr Lowe said in a statement after the meeting.

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

The currency edged a little higher after the release, and was trading at 67.91 US cents at 2.55 pm in Sydney.

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While the outlook has improved, upcoming data are set to show the full force of the shutdown, with the unemployment rate expected to rise further.

The government and RBA will need to keep up a positive narrative to avoid sentiment slipping again.

While nearly 600,000 jobs were lost in April, the jobless rate only climbed to 6.2 per cent. The RBA sees it rising to around 10 per cent by June, but below where it could have headed if not for the government's JobKeeper programme that keeps workers attached to firms.

"The rate of new infections has declined significantly and some restrictions have been eased earlier than was previously thought likely," Mr Lowe said.

"And there are signs that hours worked stabilised in early May, after the earlier very sharp decline. There has also been a pick-up in some forms of consumer spending."

The sharemarket and currency have strengthened as the authorities contained the virus and announced incremental reopening of the economy.

The Australian dollar has soared about 18 per cent since March 19, when the RBA cut the cash rate to its effective lower bound and began buying government bonds.

Australia has avoided a recession - defined locally as two consecutive quarters of contraction - since 1991. A fall in GDP in the first three months of the year would almost guarantee that streak is at an end given the worst of the downturn has been concentrated in the current quarter.

"The outlook, including the nature and speed of the expected recovery, remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy," the governor said.

"In the period immediately ahead, much will depend on the confidence that people and businesses have about the health situation and their own finances."

Partial data ahead of GDP to be released on Wednesday suggest it remains a possibility that the economy expanded in the first quarter of 2020. BLOOMBERG