Think Big: RBA cautiously optimistic after a big week on the policy front

The RBA took a cautiously optimistic approach towards Australia’s economic outlook in its financial stability review on Friday.

The half-yearly update followed a ‘Super Tuesday’ on the policy front, where the bank’s monthly rates announcement was followed by the federal government’s 2020 budget.

And despite the shock from the pandemic, the RBA said Australia’s financial system has so far weathered the COVID-19 storm relatively well.

Since the pandemic began, Australian banks have issued more $160bn worth of mortgage deferrals to assist borrowers.

But despite that, the RBA highlighted that Australia’s major lenders had actually been able to strengthen their existing capital buffers.

In addition, stress tests indicate banks “would remain above their minimum capital requirements even if the economic contraction is substantially more severe than expected”.

Property market

CBA economists said mortgage deferrals began expiring in September, with most due to expire in October.

In a more extreme negative scenario, the lapse of mortgage deferrals could flow through to forced sales which would put downward pressure on house prices.

But data released on Friday by the ABS indicates the COVID-19 policy response of record low interest rates appeared to be more than offsetting any negative consequences.

New housing finance surged ahead in August, driven by double-digit monthly growth for owner occupier loans.

Australia’s property market has also benefited from the ‘Team Australia’ policy response, with plenty of fiscal support accompanying the low-rates outlook.

Along with the $25,000 HomeBuilder grant introduced in June, the federal budget also opened up 10,000 more places for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a house with a deposit as low as 5 per cent.

Federal budget bonanza

Tuesday night’s budget exceeded most forecasts on the spending front, as the government turned on the taps and forecast a 2020-21 budget deficit of $214bn.

While there were no extensions outlined for the JobKeeper program, which is scheduled to expire in March, household tax cuts were implemented retroactively to July 2020 (pulled forward from July 2022).

And the “big surprise” for UBS was on the business side, with the government’s $30bn proposal to deduct the cost of new investments for tax purposes.

The write-off will apply to all companies with up to $5bn of revenue, which accounts for 99 per cent of Australian businesses.

With a number of analysts forecasting the RBA to cut rates again next month, to 0.1 per cent, ‘Team Australia’ is still unloading both barrels to support the Australian economy.

As a measure of how that support is flowing through to asset classes, the ASX200 rose all five days of Budget week to close 5.5 per cent higher at 6,112.40 points.