Analysis: RBA MonPol Announcement - Expectations and Possibilities

• Published on
• 19 Mar 2020, 12:37 PM

By Sophia Rodrigues

The most-awaited monetary policy announcement is due from the Reserve Bank of Australia this afternoon at 1430 hours local time.

The market has a set of expectations but is worried that the RBA will disappoint.

Below is my take on what is expected, and how RBA could exceed expectations:

--The cash rate is widely expected to be lowered by 25bps to 0.25% -- a level that is considered as the Effective Lower Bound. The RBA could indicate the possibility of the cash rate going below 0.25%

--The RBA is expected to give a forward guidance, and this could be the most crucial part of the statement. The wording of the guidance is very important because market needs to be convinced the RBA is prepared to do “whatever it takes” to not only support employment and economic activity, but also to support liquidity in the banking system (a ECB style statement).

 --The RBA is expected to announce a start to Quantitative Easing with reports suggesting they would buy government bonds at the front end of the curve, likely four-year bonds.

As Deputy Governor Guy Debelle said, QE would be to validate forward guidance by operating in the bond market to keep government bond rates consistent with the outlook for interest rates.

However, when Debelle or even Governor Philip Lowe made the comments on likely QE, they didn’t factor in the possibility of a dysfunctional bond market when such an announcement is made.

This means the purpose of QE now would be more than just a tool for forward guidance. The RBA also has the added job of supporting the smooth functioning of the market. This means an announcement to buy short-term or just four-year bonds is unlikely to be enough, especially because of the current steepness in the yield curve.

The RBA would have to target 10-year bond but the challenge is to do this when 10-year is around 1.4%. The RBA could potentially commit to buy at say 1% or just announce an intention to buy bonds along the yield curve, along with a firm signal that it would do so until the yield curve aligns with its forward guidance. Remember Debelle used the term “objective,” instead of “target.”

--The RBA is also likely to announce term funding facility at the cash rate to banks to on-lend to small and medium businesses like the Bank of England has done.

--Contact: Sophia@centralbankintel.com