2023

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EXPERT OBSERVER
With the unemployment rate unlikely to fall below 6% and central banks unconvinced about any urgent need to be pre-emptive the cash rate target is likely to hold at 0.25% at least until end of 2023. However the RBA can remain an effective force in the Policy debate through its management of the three year bond yield target.
On Tuesday the Reserve Bank Governor Lowe made a major speech where he outlined the Bank’s key economic forecasts.
These forecasts are based on the Bank’s central outlook for the policy response to the Covid Crisis whereby domestic shutdowns are gradually eased through the June and September quarters and “mostly removed by late in the year”.
Westpac released forecasts on March 31 where the central outlook for the Crisis was similar to the Bank’s central view.
We are encouraged that our forecasts are broadly in line with the forecasts the Governor released in his speech. Westpac forecast that the economy would contract by around 9.5% in the first half of 2020 (RBA minus 10%); the economy would contract by 5% over 2020 (RBA minus 6%); the unemployment rate would lift to 9% by end June (RBA 10%); implying that growth would bounce back by 4–5% in the second half of 2020, (RBA similar).
We do however differ with the RBA’s forecast for growth in 2021 with the RBA forecasting 6–7% and Westpac at 4%.
It appears that, next year, we are heading for a repeat of the last few years when RBA growth forecasts were consistently significantly above our own forecasts. That bullish view is despite the observation that “the twin health and economic emergencies that we are experiencing now will cast a shadow over our economy for some time to come”.
The other key observation was around the outlook for interest rates. The Governor indicated that he expected the three year bond target to remain in place for a “number of years”.
He also reiterated that the cash rate target would not be lifted before the three year bond yield target was lifted.
The choice of the three year bond target rate as the same as the cash rate target is strategic since it sends a clear message that if the Bank is prepared to purchase three year bonds at the overnight cash rate it is reasonable to expect that it is comfortable with the cash rate holding at 0.25% for the full three years.
This does not mean that it cannot lift the rate for the bond yield target. A higher target rate would imply that the Bank now expects the cash rate to be lifted within the three year window therefore signalling an appropriately tighter monetary policy.
A lift in the target rate would see the market’s timing for the cash rate increase brought forward and the arbitrage between swap markets and the bond rate would pin point that expected timing.
BILL EVANS is the <a href="https://westpaciq.westpac.com.au/Article/42804/16785/" target="_blank">Chief Economist at Westpac</a>
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2023

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