Insight: True QE Could Happen If RBA Sees Need for More Easing

By Sophia Rodrigues

While the rest of us have characterized the Reserve Bank of Australia’s bond-buying via auctions as Quantitative Easing, the central bank doesn’t think it is so, and this means QE still remains an unused part of the RBA’s toolkit to be used when needed.

The big question then is at what point would be the RBA consider the need to use QE – bond-buying with a focus on quantities?

The answer probably lies in following two lines from the RBA’s recent statements:

This one is from the minutes of the May board meeting, published Tuesday.

“As the Bank's policy package had been introduced only recently, members assessed that the best course of action was to maintain the current policy settings and monitor economic and financial outcomes closely.”

And this line is from the May Statement on Monetary Policy, published on May 8. It also appeared in the May monetary policy decision statement.

“The Board is committed to do what it can to support jobs, incomes and businesses during this difficult period and to make sure that Australia is well placed for the expected recovery.”

BOND-BUYING IS FORWARD GUIDANCE

The RBA embarked upon bond-buying via auction in late March with an aim to keep the three-year bond yield at the 0.25% target it had set. The bond-buying was also aimed at smooth functioning of the bond market.

Since then the RBA has bought around A$51 billion of Australian government bonds and semis, with the last buying conducted on May 6. The decision to pause reflects RBA’s confidence that the bond market can function smoothly without its presence, and because the three-year yield is around the target.

The RBA has repeatedly said it will scale up bond-buying when needed, which means it does not want market to assume that pausing on bond purchases is the same as ending purchases altogether.

So, if the RBA’s bond-buying to date is not QE, what exactly is it?

It is a form of forward guidance, and it is also to correct dislocation in the market.

To put it simply, the RBA’s targeting of yields on three-year government securities is consistent with its expectation that the cash rate will remain at its current level for some years, but not forever.  It reinforces the RBA’s guidance that it would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.

This was also exactly what Deputy Governor Guy Debelle said on March 11, a few days before the RBA announced a package of measures in response to the economic and financial impact of COVID-19.

Debelle said it is easier to think of any bond-buying by the RBA more in terms of the price sense than in the quantity sense.

Such bond-buying would be more analogous to a cut in the cash rate “than a quantity-based program where you say, we’ll buy bonds and see what happens,” Debelle said.

“It’s more (like): We will act in the government bond market as necessary to ensure an interest rate path consistent with what we think is necessary to get the economy back in a sustainable place,” Debelle said.

BOND-BUYING NOT FLATTENED YIELD CURVE, LOWERED AUD

What the RBA has not done is directed any buying at the long end to flatten the yield curve, which is what most central banks have done with their QE program.

Currently and as suggested in the minutes of the May board meeting, the RBA is in a wait and watch mode to see the impact of its March measures on the economy. By stating that the best course of action was to maintain the current policy settings, the RBA has left the option open to do more because no central bank would tighten existing settings when there is so much uncertainty.

The RBA realises that making any firm assessment on the economy is difficult at this stage because it is entirely dependent on how soon restrictions in the economy are lifted, and the risks of second wave of coronavirus.

But when things are clearer, the RBA could consider a true QE in the form of quantity-based buying of government bonds if it sees the benefit to the economy from a flatter yield curve, and importantly if it is seeking exchange rate benefit from a bond-buying program.

--Contact: sophia@centralbankintel.com