RBA Might Buy Bonds Now Via Market Ops; QE Might Come Later

• Published on
• 16 Mar 2020, 02:06 PM

By Sophia Rodrigues

The Reserve Bank of Australia might be in the market to buy government bonds using a tool that is part of its regular market operations but being done now to support the smooth functioning of the market.

Any buying that it does now is not Quantitative Easing. It is being done because trading liquidity has deteriorated.

“The Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system,” the RBA’s statement announcing the move said.

Such bond-buying would be part of flexible market operations that RBA always had the capacity to use.

Governor Philip Lowe said last year that the RBA is prepared to use the flexibility in its market operations in period of stress if necessary.

“If markets were to become dysfunctional, you can be reassured by the fact that we have both the capacity and willingness to respond,” Lowe said.

QE MIGHT COME LATER

The RBA is widely expected to deliver a cash rate cut to 0.25% on Thursday and make an announcement on QE via government bond purchases.

The RBA has previously indicated that any government bond purchase would be mainly used as signalling tool.

Deputy Governor Guy Debelle recently said the RBA’s aim would be to keep interest rates low for a sufficiently long period of time, and they would do it via forward guidance where they talk about the likely future path of interest rates.

To validate that, the RBA would also operate in the government bond market to keep risk-free curve consistent with the outlook for interest rates.

Since the objective of such bond-buying would be price signal, the RBA is unlikely to resort to any large-scale purchase, instead using market operations and other tools to provide liquidity that usually comes with large-scale purchases.

In line with that, the RBA last week conducted repos of bigger amounts and this morning announced it will be conducting one-month and three-month repo operations in its daily market operations until further notice to provide liquidity.

In addition, the RBA will conduct longer term repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant.

If the RBA announces QE, it is possible it would have bond purchases via QE and bond-buying via regular market operations running simultaneously to meet its signalling goal and to ensure market functions smoothly.

--Contact: sophia@centralbankintel.com