The Reserve Bank board is not contemplating any further interest rate reductions after slicing the cash rate to a wafer thin 0.1 per cent.
But it eased monetary policy this week believing that despite forecasting better economic outcomes in Australia, its outlook implies a large shortfall in activity that is inconsistent with full employment.
“Interest rates have been lowered as far as it makes sense to do so in the current environment,” the RBA said in its quarterly monetary policy statement released on Friday.
“The board considers that there is little to be gained from short-term interest rates moving into negative territory and continues to view a negative policy rate as extraordinarily unlikely.”
The RBA has upgraded its growth and unemployment forecasts, predictions that were discussed by the board at Tuesday’s meeting.
“It concluded that, despite the somewhat better recent outcomes in Australia, the recovery was expected to be extended and bumpy,” it says.
“To further support the recovery and complement the significant support coming from fiscal policy, the board therefore decided to introduce a further package of measures.”
While reducing the cash rate to a record low, it also lowered rates on its growing number of monetary policy tools, and entered into a $100 billion bond buying program.
This program, otherwise known as quantatitive easing, will be the focus of its future policy decisions until rates need lifting again, possibly in three years time.
The combination of its bond purchases and lower interest rates are expected to improve financing costs for borrowers and contribute to a lower exchange rate.
The board is prepared to undertake additional bond purchases if required.
“At its future meetings, the board will be closely monitoring the impact of bond purchases on the economy and on market functioning, as well as the evolving recovery from the pandemic, including the outlook for jobs and inflation,” it says.
The RBA says the unemployment rate is likely to increase in the near term, but is now forecasting a peak of a little below eight per cent around the end of the year rather than the 10 per cent it predicted three months ago.
This increase is partly because some workers who withdrew from the labour force in the early months of the pandemic are expected to return, responding to improving job prospects in some areas and a tightening of eligibility requirements for the JobSeeker dole payment.
The jobless rate was 6.9 per cent in September.
Unlike the RBA, AMP Capital senior economist Diana Mousina doesn’t expect this peak to come until mid-2021 when the JobKeeper wage subsidy finishes.
“There is a chance that the government decides to keep the JobKeeper program on in some form, although at this stage that appears unlikely if virus cases remain low,” she said.
However, the RBA has warned the unemployment rate could hit nine per cent in late 2021 should Australia suffer further major coronavirus outbreaks.
Conversely, if progress is made in controlling the virus through medical treatment in the short term, the jobless rate would peak at 7.5 per cent.
The statement came as new figures showed Australia’s services industry is expanding for the first time since November 2019 as government stimulus and improved confidence leads to an increase in sales, new orders and deliveries.
The Australian Industry Group performance of services index surged 15.2 points in October to 51.4 points.
Ai Group said the move above 50 points indicated a tentative recovery in national domestic demand was under way.