Analysis: Why RBA May Have Delayed QE Announcement

• Published on
• 18 Mar 2020, 10:17 AM

By Sophia Rodrigues

A smooth functioning of financial markets may be a prerequisite for the Reserve Bank of Australia to conduct Quantitative Easing especially since it is expected to focus on prices, and that explains why they have not already announced such a move.

This week there has been a lot a criticism on why the RBA hasn’t already lowered the cash rate to the Effective Lower Bound of 0.25% and announced QE, instead signalling they are likely on Thursday.

The RBA may have resisted cutting the cash rate because it is unlikely to achieve anything if it is not accompanied by a QE announcement. Besides market is already fully pricing in a cut, so there is no urgency to act a few days early.

But announcing a QE is a big step for the RBA and it is difficult to do so when trading liquidity is low and market isn’t functioning efficiently, and because the QE is expected in the form of yield curve control.

To support smooth functioning of the market, the RBA instead decided to announce it stands ready to purchase Australian government bonds, which is a key pricing benchmark for the local financial system. And it announced longer-term repos to meet the more urgent need for liquidity because the QE isn’t expected to be a liquidity tool.

The announcement meant the RBA is in the market to buy bonds outright but whether it has actually done so is unclear. The aim was likely to have an “announcement effect” so prices move up (yields fall) to a point at which the RBA is expected to buy, either now or via QE.

Bond yields at the short end of the curve have fallen in the past two days but the 10-year yield has risen to 1.13% from 0.96% on Monday. It initially fell to 0.92% but moved up in the past day.

The rise in 10-year bond yield would make the RBA’s job difficult because buying a bond around the current price defeats the whole purpose of doing QE to flatten the yield curve.

What the RBA eventually announces is anyone’s guess. If I was RBA I would in the first instance announce bond-buying via auction method at different points of the curve, notifying a single maximum amount.

--Contact: Sophia@centralbankintel.com