Insight: RBA Policy Rate Now a Range Like the Fed
- Published on
- 07 Apr 2020, 07:02 PM
By Sophia Rodrigues
The Reserve Bank of Australia is expressing its cash rate target as 0.25% but it is now effectively a range of 0.10% to 0.25%, like the Federal Reserve’s policy target range.
This means the RBA is not fussed by the interbank overnight rate dropping below the cash rate target, and doesn’t see the need to raise the deposit rate on Exchange Settlement balances to push the overnight rate towards 0.25%.
It also means the RBA is not likely to lower the cash rate to 0.10%.
In an article on April 1, I wrote about how, for the first time ever, the RBA is using “cash rate target” instead of “cash rate” in its monetary policy statement, and it might be an indication that the cash rate is now a range.
RBA CUTTING DAILY REPOS
In recent days, the overnight rate has been steadily falling to 0.18%, leading to some expectations in the market that the RBA would lower the cash rate to 0.10% like the Bank of England recently did.
But the fall in the cash rate has been in line with the RBA’s expectation and within the range for its cash rate target. The RBA is therefore not considering any cut in the cash rate or an increase in the rate on ES balances.
What is likely is the RBA would be trying to prevent the overnight rate from falling too close to 0.1% by not allowing too much liquidity to build in the system.
In the monetary policy statement Tuesday, the RBA said it will do daily open market operation on a smaller scale in the near term because there is substantial liquidity in the system and more is expected from the commencement of the Term Funding Facility.
Since last week, the RBA has scaled down the size of lending via repos but outstanding amount in repos is still around A$90 billion. As a comparison on March 13 the outstanding amount was around A$54 billion, so it was likely much lower than that before markets turned volatile.
--Contact: sophia@centralbankintel.com