Quick Analysis: RBA Keeps Rates on Hold But Signals Imminent Easing

• Published on
• 06 Oct 2020, 02:58 PM

By Sophia Rodrigues

The Reserve Bank of Australia left the cash rate target unchanged at 0.25% Tuesday but its comment on the three-year bond yield was a clear signal that it will ease policy next month.

At the board meeting, the RBA left the target on three-year government bond yield unchanged at 0.25% along with retaining its policy on Term Funding Facility.

Following are the highlights from the statement:

--The RBA said three-year bonds yields have fallen to around 18bps (below its 0.25% target) as markets price in some probability of further monetary policy easing. That is a signal that the RBA is endorsing market pricing.

--The RBA said the Australian dollar remains just a little below its peak of the past couple of years. The comment indicates the RBA remains watchful of any appreciation in the exchange rate.

-- The sharp contraction in GDP in Q2 was smaller than the RBA expected, and the unemployment rate is likely to peak at a lower rate than earlier expected. This means the RBA no longer expects the jobless rate to reach as high at 10% by December.

--Still, the high jobless rate is an important national priority, the RBA said. This is a key reason the RBA will ease monetary policy next month which is confirmed in the last line of the statement that it continues to consider how additional monetary easing could support jobs as the economy opens up further.

--The RBA expects further very significant expansion of its balance sheet as banks access their supplementary and additional TFF allowance. This indicates TFF is RBA’s preferred instrument of choice for easing, and makes aggressive Quantitative easing unlikely.

--Contact: Sophia@centralbankintel.com