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RBA Keeping the Monetary Policy Unchanged

July 7, 2020 By Mircea Vasiu

The Reserve Bank of Australia (RBA) kept the cash rate unchanged at 0.25% as it released its monetary policy decision today. The decision, highly expected, did not have an influence on the currency market’s volatility, although the Australian Dollar (AUD) reacted weakened somehow shortly after. 

The RBA and the Australian Dollar (AUD)

The Australian economy is for the first time in a recession following decades of economic growth. At one point, Australia was the envy of the developed world – high growth, low unemployment, strong housing sector.

For years, the AUD reflected that strength, as the RBA kept a high cash rate level when compared with peers’ central banks in the world. Faced with the coronavirus recession that affects all countries in the world, the RBA is in an unusual position of learning how to deal with a recession. None of its members had experienced one.

It does not mean, however, that the bank is clueless. As central banks act under the umbrella of the Bank for International Settlement in Basel, Switzerland, decisions in one part of the world are known in others. Therefore, just like a doctor applies the same treatment to patients with similar symptoms, the central bankers do the same – apply the same monetary policy tools to similar economic conditions.

At this meeting, the RBA acknowledged the severe downturn created by the COVID-19 crisis. Moreover, it expects a bumpy economic recovery and an uncertain economic outlook. It all depends on how the virus is contained moving forward.

Speaking of containment, some Australian regions did not do so well recently, with Victoria back under confinement. New cases suggested the infection rate grows out of control, and the lockdown was the only answer. This is something we have seen in other parts of the world too, like Europe (e.g., regions in Spain, Germany), or some states in the United States.

The RBA is aware that the Australian economy suffers the worst contraction since the 1930s, with almost a million people losing their jobs. However, conditions have stabilized somewhat, with leading indicators suggesting that the worse may be behind.

The markets’ reaction to today’s announcement was muted. The AUDUSD pair fell about sixty pip points since the announcement, but that is unlikely to be a reaction to the RBA statement as the USD appreciated across the board (e.g., the EURUSD pair fell back below 1.13).