RBA: LOWERING SHORT-TERM RATES WOULD ALSO LOWER LONG-END RATES

• Published on
• 17 Nov 2020, 12:00 AM

RBA: LOWERING SHORT-TERM RATES WOULD ALSO LOWER LONG-END RATES
RBA: SAW PACKAGE OF MEASURES AS DESIRABLE DUE TO COMPLEMENTARY NATURE
RBA: DEBATED WHETHER TO EASE OR WAIT FOR MORE INFORMATION
RBA: HIGH JOBLESS, SUBDUED INFLA F’CAST MADE CASE FOR NOV EASING
RBA: 10-YR YLD WAS HIGH VS OTHERS AS RBA’S GOVT DEBT HOLDING LOW
RBA: EXPECTATIONS OF QE LED TO 10-YR YIELD FALL VS US TREASURY

By Sophia Rodrigues

The Reserve Bank of Australia recognizes that lowering short-term rates would also lead to a fall in rates at the long end of the curve and that is a key reason why it implemented the latest easing as a package of measures that included Quantitative Easing.

In the minutes of the November 3 board meeting, published Tuesday, the RBA said, “interest rates further along the yield curve capture expectations about the path of short-term rates, so lowering short-term rates would also lower rates at the long end of the yield curve.”

At the meeting, the RBA cut the cash rate target and the rate on Term Funding Facility to 0.1%. It also lowered interest rate on Exchange Settlement balances to zero and cut three-year yield target to around zero. In addition, the RBA announced QE program where it will be buy A$100 billion of bonds of around 5-10 year maturities over the next six months.

The RBA saw these measures as complementary and hence desirable to be implemented as a package.

The RBA debated whether to implement the package at the meeting or wait for more information but decided it is appropriate time because its forecasts suggested unemployment would remain high and inflation subdued for an extended period.

The RBA also recognized that further information in coming months was unlikely to change that assessment.

Another discussion focused on the merits of targeting a five-year yield but the RBA judged that the current three-year target was most effective because it was consistent with the forward guidance on the cash rate.

“The Board expects the cash rate to remain at its current level for at least 3 years, but beyond that members have less confident about the path of interest rates,” the RBA said. Also, the RBA acknowledged that other factors have a greater influence on yields at longer horizons.

At the meeting, the RBA noted that increased market expectations for a government bond purchase program had led to decline in 10-year yield relative to US Treasury yields. Previously, the yield on 10-year AGS had been high relative to the 10-year bonds of other advanced countries partly because the holdings of government debt by the RBA were relatively low as a share of GDP.

The decline in Australian yields relative to other countries along with lower commodity prices had contributed to a depreciation of around 5% in the Australian dollar since early September.

 --Contact: Sophia@centralbankintel.com