RBA Launches QE Program, Cuts Key Interest Rates, Commits to Do More If Required

• Published on
• 03 Nov 2020, 03:03 PM

By Sophia Rodrigues

The Reserve Bank of Australia launched a Quantitative Easing program, cut key interest rates, issued forward guidance suggesting highly accommodative monetary policy for longer and said it will do more if necessary, following one of its most awaited board meetings ever.

The RBA said it will purchase A$100 billion of government bonds of maturities of around 5-10 years over the next months.

The buying will be split between AGS and Semis in 80/20 proportion. The RBA will buy A$5 billion of bonds each week on Monday, Wednesday and Thursday comprising of A$2 billion at each AGS auction, and A$1 billion at Semis auction. The first such auction will be on Thursday and will be via multiple-price method.

RBA will only buy fixed rate bonds, and exclude treasury-indexed bonds.

Apart from the QE program, the RBA will continue to buy bonds as needed to meet its new three-year government bond target of 0.1%, and to address any dislocations in the shorter end of the yield curve.

“These purchases will be announced as relating to the yield target, and will not form part of the A$100 billion bond purchase program,” the RBA said.

In other key decisions, the RBA lowered the cash rate target to 0.1% from 0.25%, and lowered the rate on Exchange Settlement balances to zero from 0.1%.

The RBA also cut interest rate on new drawings under Term Funding Facility to 0.1% from 0.25%.

The RBA said its decisions were aimed at addressing high unemployment that Australia is currently facing. While recent economic data have been better than expected, the RBA said the recovery is still expected to be bumpy and drawn out, and the outlook remains dependent on successful containment of the virus.

Equally important in Tuesday’s statement was the RBA’s forward guidance where it said it won’t increase the cash rate until actual inflation is sustainably within the 2% to 3% target range. This will require significant gains in employment and a return to tight labour market, the RBA said.

The RBA said it will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation, and is prepared to do more if necessary.

--Contact: Sophia@centralbankintel.com