Insight: RBA Prepared to Add Monetary Stimulus as Early as October

• Published on
• 02 Sep 2020, 09:58 AM

By Sophia Rodrigues

The Reserve Bank of Australia has a range of monetary measures under consideration and is prepared to act as early as next month.

Such a possibility is in contrast with market pricing which is forecasting steady cash rate of around 0.12% until June 2021, as per ANZ data. The cash rate is currently at 0.13% versus the RBA target of 0.10%.

CB-Intel has previously discussed the RBA is open to lowering the cash rate target to 0.10%, along with cutting the three-year yield target and the interest rate on Term Funding Facility to 0.10%.

A cut in TFF rate to 0.10% may even extend to amounts already drawn down by banks. Banks’ initial funding allowance under TFF is A$84 billion which must be drawn down by the end of September. On Tuesday, the RBA said banks had so far accessed A$52 billion.

CB-Intel also previously wrote the RBA would consider large-scale asset purchases which would mean buying more quantities of government bonds, rather than simply buying bonds to ensure consistency with its 3-year yield  target.

Expectation of further appreciation in the Australian dollar would be a reason for the RBA to follow such a path. As CB-Intel said on Tuesday, the RBA is already getting worried that further gains in the exchange rate would hurt the economy and jobs, and have a detrimental impact on the progress in inflation.

An additional measure being considered by the RBA is extending the yield target. This would reflect expectation that the cash would remain lower for longer, possibly as long as five years. The RBA may target yield for five-year bonds.

Recall Governor Philip Lowe’s comments at the Parliamentary testimony last month. “If I had a very high degree of confidence that the cash rate was going to be here for five years, then there would be stronger argument to target a five-year yield, but let's start with the three and see where that goes and how the economy progresses,” he said.

--Contact: Sophia@centralbankintel.com