MNI REVIEW: RBA Eases, But Has More Firepower If Needed

The Reserve Bank of Australia has more monetary policy firepower to deploy if needed, even after the launch of a quantitative easing program and a rate cut, Governor Philip Lowe said Tuesday.

Speaking after announcing an AUD100 billion QE program and a 15bps cut in official rates to a record low 0.10%, Lowe said future options include "further liquidity provision, asset purchases, and transactions in the foreign exchange market."

However, he though the central bank had "gone as far as it makes sense to go" and reiterated that negative rates in Australia were "extraordinarily unlikely" although he did not rule them out.

"While a negative rate might lead to a helpful depreciation of the Australian dollar, it could impair the supply of credit to the economy and lead some people to save more, rather than spend more," Lowe said.

"I think we have done as much as we can on interest rates."

However, he did say if other major central banks moved to a negative rate regime, the RBA would need to reconsider its position.

QE, OR NOT QE

The QE measures will see the RBA buy AUD100 billion of government bonds with maturities between five to ten years over the next six months on the secondary market. There was no yield target in these purchases, Lowe said. The purchases will be split, with 80% allocated to federal government debt and the rest to debt issued by Australian states and territories.

This is in addition to the yield control program announced in March under which the RBA has purchased AUD63 billion of bonds targeting a yield of 0.25% on the benchmark three-year government bond. This target will now move to 0.10% and the program will continue.

On the issue of bond purchases, Lowe said quantities mattered and added that the RBA would "continue to closely monitor the economic situation and the impact of our purchases on market functioning."

He did not rule out QE for longer-dated bonds or expanding the program's size, if required, although he stressed purchases of longer-dated paper would likely be linked to market functioning.

The RBA also cut the interest rate on its Term Funding Facility for commercial banks to 0.10%, which has seen banks draw down AUD83 billion since March. The central bank will also reduce the interest rate on Exchange Settlement balances to zero.

OUTLOOK

The measures coincide with an improved outlook for the economy. Lowe said that easier monetary policy would have more "traction" with the reopening.

More details of the RBA's outlook will be published in the quarterly Statement on Monetary Policy on Friday, but Lowe pointed to household spending and labour market data as being a "little stronger than expected" and said that GDP had increased solidly in the September quarter despite the lockdown in Victoria.

He said the new measures were aimed squarely at unemployment, a problem which "damages the fabric of our society."

A lower Australian dollar was desirable and while the currency was likely to fall due to the new measures, that was not an aim in and of itself. He again downplayed forex intervention, saying it would only be seen to address a dysfunctional market.

The RBA has a dual mandate to tackle unemployment and inflation. But Lowe said that with inflation risks remaining low, the "priority over the next couple of years is jobs."