RBA significantly stepping up the stimulus
At its meeting on Tuesday, the Reserve Bank of Australia (RBA) significantly stepped up its monetary stimulus, expanding its Term Funding Facility (TFF) by another $57 billion and reporting another $10 billion of bond purchases over August. In our view, this takes the RBA from a lagged G10 central bank to in line, with its balance sheet to expand at least 8.7% of GDP over the next 9 months.
We see eight positives to lift the Australian economy and market, including:
- Australia exiting its second wave: In the five weeks after the peak of the first wave, the market had rallied 8%, but this time it is flat.
- Improving prospects for a vaccine: Good judgment puts a 63% probability on a mass vaccine by end-1Q21 and 92% by end-3Q21.
- Expanded and extended fiscal stimulus: Already $35 billion (1.75% of GDP), the stimulus should reach 3-4% of GDP in the October budget.
- COVID-19 super early release scheme: Already $33.2 billion, this scheme should reach $42 billion, or 2.1% of GDP.
- Asia’s V-shaped recovery, led by China, Taiwan and Korea, lifting Australian exports and commodity prices.
- Iron ore windfall: At current levels, iron ore exports could add 2.6% to GDP. Overall, commodity prices are 1.6% above pre-COVID-19 levels.
- Five drivers of a GDP snapback: Beaten down services spending, a record high 19.8% saving rate, a record $4.1 billion inventory liquidation, business windfalls of ~$50 billion and farm rebound.
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