Insight: RBA Likely to Launch True QE in Nov, Will Also Cut Rates
- Published on
- 06 Oct 2020, 03:57 PM
By Sophia Rodrigues
The Reserve Bank of Australia is highly likely to launch true Quantitative Easing next month by announcing a program for large-scale bond-buying at the longer-end of the curve.
This is a change of view from CB-Intel from the previous expectation that the RBA will do additional bond-buying at the longer end of the curve but may not do large-scale purchases.
An announcement on QE will be accompanied by a cut in targets for the cash rate and three-year government bond yield to 0.1% in November, along with a cut in interest rate on Term Funding Facility.
FOCUS BOTH ON YIELDS AND AMOUNT
The RBA has been closely following QE programs of other central banks and believes there is a need for QE in Australia that would focus both on yields and on amount.
So, a QE program of a certain notified amount per week or a total program size is what seems like a likely scenario now.
It is worth noting Deputy Governor Guy Debelle’s comments on QE from his speech last month where the emphasis was on “regular basis.”
“One option considered is to buy bonds further out along the curve, supplementing the three-year yield target. Purchases would still be conducted to maintain the target for the three-year bond, but additional purchases could occur further out the curve on a regular basis,” Debelle said.
The liquidity impact from QE will be in addition to the “very significant expansion” of balance sheet that the RBA is expecting from TFF but the RBA thinks both forms of monetary easing are necessary to meet its goals of employment and inflation.
IT’S ALL ABOUT AUD
The RBA also thinks the exchange rate is a key channel through which monetary policy would work in the recovery stage of the economy, and an aggressive QE program is important to keep a lid on the exchange rate.
The RBA’s comment on the exchange rate in the cash rate statement was a statement of fact but the mere mention of it suggests it is watchful of any appreciating trend.
Similarly, the RBA’s comment on three-year bond yield was a signal that it is endorsing market pricing of rate cut.
“Over the past couple of weeks, 3-year yields have fallen to around 18 basis points as markets price in some probability of further monetary policy easing,” the RBA said in the statement.