RBA Preview: what to expect from the RBA’s emergency meeting

The economic data that matters:

What are the key themes to watch out of this RBA meeting?

The COVID-19 emergency response

The Australian economy is at a high risk of entering a recession, as a result of the impacts of the global coronavirus pandemic. Central bankers, and other economic policymakers, have pulled-out all stops to support the global economy as signs mount of a looming downturn in global growth, pumping trillions of dollars’ worth of economic stimulus in the past month. The RBA has already cut interest rates once in direct response to the crisis, at the start of this month. But as central bankers across the globe have resorted to extraordinary stimulus measures to support markets and economies, it’s become apparent the RBA will have to follow suit, in order to keep pace, and ensure the Australian economy is adequately supported to weather the crisis.

The RBA's new policy tools

The RBA is expected to cut rates as its first emergency measure. But given the cash rate is already at historic lows of 0.5%, another 25-basis point cut to the RBA’s “Effective Lower Bound” of 0.25% in unlikely to provide the boost the Australian economy needs. Hence, the RBA is likely to announce a suite of “unconventional” monetary policy measures to push interest rates lower, ease financial conditions, and stimulate economic growth. The measure will likely be a Quantitate Easing program, where the RBA will purchase government bonds to pump money into the economy; along with a policy of yield curve control, where the RBA actively suppresses long-term bond yields, in order to keep borrowing rates low throughout the economy.

How could the RBA meeting impact the financial markets?

Markets have already moved to price-in the likelihood that the RBA will embark on a quantitative easing program. The results have already been in financial market action. Australian Government Bond yields have plummeted, as traders prepare for a world of low interest rates, high demand for government paper, and artificially supressed yields. The fall in Australian rates has resulted in a widening of yield differential for the Australian Dollar across most currency pairs, with the AUD/USD falling to fresh 17-year lows, and trading into the 59-cent handle as a result. The stock market has also likely been hit in the short-term by the expectation of an Australian QE program, with bank shares plummeting as markets price-in a hit to bank profits from lower interest rates.