Insight: Despite Meeting Goals RBA Likely to Continue QE

• Published on
• 06 May 2020, 02:28 PM

By Sophia Rodrigues

Despite a mostly smooth functioning government bond market, the Reserve Bank of Australia is likely to continue bond-buying via auctions as part of Quantitative Easing at least once a week to ensure it has an insight into sellers in the market.

Currently, the RBA does bond-buying on Mondays, Wednesdays and Thursdays, with Wednesdays dedicated for purchase of semis. This leaves Mondays and Thursdays as options, but not a compulsion, for purchase of Australian government bonds.

The RBA is likely to use the option to buy on at least one of these days for a minimum amount of A$500 million.

With the three-year government bond currently trading around the RBA’s 0.25% target and market largely functioning well, there is technically no need for the RBA to continue its purchases.

But not doing any purchases means the RBA will no longer have the advantage of being a buyer at an auction which gives visibility into pricing and through that understand if there’s any desperation to sell.

The RBA also recognizes that if it doesn’t announce any purchases, market will assume they have stopped the QE completely, and that has the potential of creating instability in the market again.

So small, infrequent purchases is what the RBA expects to continue doing even though it has met its three-year government bond target and markets are functioning in a stable manner.

In the Monetary Policy Decision statement Tuesday, Governor Philip Lowe said the RBA is prepared to scale-up purchases again and will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for 3-year AGS.

The RBA has so far made purchases totalling A$50.7 billion, with a plan to buy a further A$600 million of semis later Wednesday.

--Contact: sophia@centralbankintel.com