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Australian Central Bank Keeps Policy on Hold, Awaits Budget

Australia’s central bank kept monetary policy unchanged Tuesday, clearing the field for the government to unveil a fiscal blueprint designed to drive the economy’s recovery from a Covid-induced recession.

Reserve Bank Governor Philip Lowe kept both the key interest rate and three-year yield target unchanged at 0.25%, as expected, having earlier expanded a bank lending program that officials said represented “substantial stimulus.” Yet, labor market outcomes are of key focus as the bank prepares its forecast update ahead of next month.

“The Board views addressing the high rate of unemployment as an important national priority,” Lowe said in a statement following the meeting. Adding that policy settings will remain highly accommodative for as long as required and the bank “continues to consider how additional monetary easing could support jobs as the economy opens up further.”

The RBA said labor market conditions have improved and the peak in the jobless rate could be lower than previously expected. Still, unemployment and underemployment were likely to remain high for an extended period.

The Australian dollar initially rose on the statement before falling back to be little changed at 71.87 U.S. cents at 3:11 p.m. in Sydney.

RBA said addressing high unemployment is a national priority

The RBA has been working in tandem with fiscal policy makers, pushing down the cost of borrowing to smooth the path for major spending programs. The government’s budget, due five hours after the rate decision, is expected to see a boost to infrastructure, the bringing forward of tax cuts and other measures to kick-start a recovery.

Economists expect the budget deficit will swell to A$220 billion ($158 billion), or 11.6% of gross domestic product, this fiscal year, and unemployment is forecast to rise to 8% by mid-2021 from the current 6.8%, according to the median estimate of a Bloomberg survey.

“Public sector balance sheets in Australia are in good shape, which allows for continued support, with the Australian Government budget to be announced this evening,” it said. “Both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment.”

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