RBA: Ending QE Would Have Led to Unwelcome Significant Rise in AUD
- Published on
- 16 Feb 2021, 11:32 AM
By Sophia Rodrigues
(Sydney, February 16, 2021) -- The Reserve Bank of Australia judged that ending its Quantitative Easing program in April would have led to an unwelcome significant upward pressure on the exchange rate, given central banks in advanced economies announced extensions.
Widespread market expectation the RBA would extend its QE in some form, and the fact that the economy would be short of its inflation and jobs goals for some years, also contributed to the decision to announce QE II at the February board meeting.
In the minutes of the board meeting published Tuesday, the RBA said its package of additional policy measures announced in November had contributed to the Australian dollar being “noticeably lower” than it would have been otherwise.
A corollary to that is that any removal of such policy measures would put significant upward pressure on the exchange rate, which would be unwelcome for the economy.
The economy needs “very significant monetary support” for some time, and it would be premature to consider withdrawing monetary stimulus, the RBA said.
The RBA noted that longer-dated Australian government bond yields had increased since early December, but this largely reflected international developments, and the differential to US Treasuries had been broadly stable over that period.
The RBA’s estimate was that longer-term AGS yields were around 30bps lower than otherwise as a result of the QE.
The RBA also observed that the size of its balance sheet relative to GDP remained lower than that of most other advanced economy central banks.
On the three-year yield target, the RBA noted that it had been effective in lowering short-term interest rates which matter most for private borrowing and lending decisions. The target had also helped to anchor the Australian yield curve, and reinforced the bank’s forward guidance regarding the cash rate.
The RBA would consider later in the year whether to shift the focus of the yield target to the November 2024 bond from the April 2024.
--Contact: Sophia@centralbankintel.com