Analysis: RBA QE: Bond Buy Only to Support Fwd Guidance; Liquidity Via Mkt Ops

• Published on
• 13 Mar 2020, 09:18 AM

By Sophia Rodrigues

Purchasing government bonds with forward guidance as the main reason and providing liquidity via enhanced market operations are likely to be the Reserve Bank of Australia’s favoured measures as the cash rate moves to the Effective Lower Bound.

It is possible the RBA could resort to special market operations as soon as Friday after the rout in global financial markets overnight, that led to the Fed ramping up repo operations.

During the global financial crisis, the RBA provided liquidity in the domestic market by expanding the list of securities used as collateral for repos, and offering longer-term repos of six-month and one-year duration.

RBA’S FAVORED TOOL -- REPOS

Governor Philip Lowe has signalled a preference for using such liquidity enhancing measure in the future, if indeed.

In a speech on Unconventional Monetary Policy last year, Lowe said the RBA has “long had flexible market operations that allow us to ensure adequate liquidity in Australian financial markets. We have used this flexibility in the past, particularly during the global financial crisis, and we are prepared to use it again in periods of stress if necessary.”

He reiterated that, “If markets were to become dysfunctional, you can be reassured by the fact that we have both the capacity and willingness to respond.”

TERM FUNDING MIGHT BE A POSSIBILITY

Given the current reaction in markets is due to global pandemic and has significant economic implications, it is possible the RBA would also consider a term funding scheme like the Bank of England has announced.

The Reserve Bank of New Zealand listed term lending as one of the tools it might use. “The provision of collateralised long-term loans to banks in order to support monetary policy transmission through the banking sector. The loans could be provided with conditions that require banks to increase their credit supply,” the RBNZ said in a document on unconventional monetary policy.

BOND-BUYING TO VALIDATE FORWARD GUIDANCE

As far as government bond purchases go, the RBA is expected to consider it once ithe cash rate is lowered to 0.25% but rather than using it as a liquidity measure, it would be a signalling tool. This is especially because government bond yields have already fallen in anticipation of QE, and the exchange rate has also fallen.

Deputy Governor Guy Debelle confirmed this at the Q&A following a speech earlier this week when he said there are scenarios when the RBA will have to consider QE.

He said the RBA’s aim would be to keep interest rates low for a sufficiently long period of time, and they would do it via forward guidance where they talk about the likely future path of interest rates.

To validate that, the RBA would also operate in the government bond market to keep risk-free curve consistent with the outlook for interest rates.

Since the objective of such bond-buying would be price signal, the RBA is unlikely to resort to any large-scale purchase, instead using market operations and other tools to provide liquidity that usually comes with large-scale purchases.

--Contact: sophia@centralbankintel.com