MNI PREVIEW: RBA Set To Trim Rates, Up Bond Buys

The Reserve Bank of Australia is set to ease policy at the November meeting, with growing expectations of a modest reduction in rates and a revised bond buying program focusing on quantitative volume rather than specific yield targets..

The central bank has prepared the market for a moove in recent weeks, feeding expectations of further easing through a series of speeches by Governor Philip Lowe and Deputy Governor Guy Debelle, both of whom have said that easier monetary policy will have more traction in a re-opening and recovering economy.

As lockdown restrictions are eased in Victoria and Australia saw no new Covid-19 cases reported on Saturday, the first blank in 5 months, the RBA could decide the timing is right to ride an economic uptick and boost the economy.

At 0.25%, official interest rates are already at a record low but are not at the RBA's lower bound, which MNI understands is now at around 0.10%.

BOND BUYING

Since March, the RBA has also purchased around AUD63 billion in government securities, targeting a 0.25% yield on the benchmark three-year bond, but Lowe has mused publicly in recent weeks on the impact of also targeting longer dated bonds. Fellow board member Ian Harper added fuel to the speculation of further bond purchases this week, telling MNI that interest rates were not the only "weapon" in the RBA armory.

"There's nothing to stop the central bank intervening at other points along the yield curve to secure lower rates at different terms thereby communicating in the most credible manner what it regards as the outlook for the cash rate into the future," Harper said, speaking in a private capacity and not as an RBA board member.

There is an expectation that instead of setting a yield target and purchasing bonds to achieve it, the RBA will shift focus and quantify the bonds it intends to purchase in a more recognizable form of QE.

Inflation data published in late October showed a 1.6% rise in the all groups Consumer Price Index in Q3, for annualized inflation of 0.7%, and while this was slightly ahead of forecasts the data is not expected to dissuade the RBA from moving on Tuesday. At 0.7%, inflation is still well below the RBA target of between 2% and 3%.