While the medical prognosis looks less alarming, the economic prospect is as grim as ever. The Reserve Bank has done what it can, now it’s up to the government, writes Stephen Grenville.

We already had a good reading of the Reserve Banks thinking from governor Philip Lowes speech on April 21: output down 10 per cent in the first half of this year, with recovery starting in the September quarter. Unemployment would register 10 per cent, with many more hidden by the JobKeeper wage subsidy.
Friday’s Statement on Monetary Policy provided alternative scenarios that were evenly balanced between optimism and pessimism. Even the optimistic scenario has normality “a couple of years away”.
Its not surprising, then, that the RBA hasnt seen the need to tweak the March policy package much.
Conventional policy the short-term interest rate was set at effective-zero in March. Forward guidance assured financial markets that this would stay for the duration. Nothing more to do here.
The March package had two more objectives. First, to encourage the banking sector to play a shock-absorber role by funding the cash-flow consequences of business hibernation and recession. Second, to ensure that the government could fund the huge deficit in prospect.
These objectives are taking the RBA into territory which has become conventional for many other central banks since the 2008 GFC, but where the RBA hasnt ventured, at least in the post-1980s deregulated world.
There was clearly a huge need for funding to bridge the cash-flow shock. The RBA cant help these borrowers directly it has no mandate to lend to the private sector. But its $115 billion of new Term Lending Facility encourages banks to maintain existing loans and maybe even expand lending. Only $4 billion of the TLF has been drawn so far, but business borrowing picked up sharply in March.
As part of the March package, the RBA overcame its earlier lack of enthusiasm for quantitative easing and began yield-curve management, buying three-year bonds to keep the yield at 0.25 per cent.
This has dual objectives. It facilitates and cheapens commercial banks funding. This has been brought down by around 75 basis points. At the same time, it underwrites budget funding, by standing ready to buy any three-year bonds the Australian Office of Financial Management issues.
The RBA does this indirectly, buying in the secondary market. But when the market knows that it can on-sell at will to the RBA, this is not much different from the RBA purchasing the bonds directly.
Already, in just a month, the RBA has purchased more than $50 billion of government bonds, not far short of half the size of the proposed budget stimulus.
The RBA hopes that a more moderate pace of purchase will be enough not just to keep the three-year rate at 0.25 per cent, but to keep the 10-year rate at its current extraordinarily low yield, below 1 per cent.
Lets see how this works out over time. It would be unfortunate if the RBA extends its yield-curve management to the long end of the curve, as this commitment could be difficult to unwind when interest rates need to return to normality.
The message of the statement is that the RBA, in its March measures, has done all it can sensibly do to help bridge the downturn. The heavy lifting has to be done with fiscal policy.