The Reserve Bank of Australia Board holds its monthly policy meeting today; the third occasion it has met in the past 5 weeks. At its meeting back on March 3, a deteriorating outlook in response to the COVID-19 outbreak prompted the Board to lower the cash rate by 25 basis points to 0.5%. With global markets under severe strain and after aggressive easing by other central banks, the Board held a special meeting on March 18 and delivered a number of significant announcements the following day. These announcements included a rate cut of 25 basis points taking the cash rate to its effective lower bound of 0.25% and introducing a state-based form of forward guidance, commencing bond purchases to target a yield of 0.25% on a 3-year Commonwealth Government security, establishing a $90bn liquidity facility offering 3-year funding to the banking sector fixed at 0.25% and making an upward adjustment of 10 basis points on exchange settlement balances.
To be clear, these are very significant announcements and change the tools the Bank will use to pursue its objectives. For a Board that never expected to have to turn to unconventional measures, how this new policy framework will play out and how it will communicate its thinking to the markets in that situation are unknowns. What is known is that the minutes from the March 18 meeting confirmed the cash rate was now at its effective lower bound and that the Board had "no appetite" for going negative. With quantitive easing now its primary policy tool, these minutes outlined that the 3-year yield target would likely remain in place "until progress was made towards the Bank's goals of full employment and the inflation target" and that "it would be appropriate to remove the yield target before the cash rate itself was raised". By way of background, as of yesterday (6/4), the RBA had purchased a total of $31.0bn of Commonwealth Government Bonds, with daily purchases starting out on March 20 at $5.0bn, then $4.0bn (23rd and 24th), $3.0bn (26th to April 1) and then $2.0bn thereafter. The chart, below, highlights this program has kept the 3-year yield well anchored around its target.
In Governor Lowe's decision statement, to be released at 2:30PM (AEST), the key interest will be around how effective the initial stages of its quantitive easing program are assessed to have been and if the possibility of future changes around its structure is left open. With visibility over the outlook extremely limited, the Governor is likely to reiterate the sense of coordination between the Bank and the nation's fiscal authorities in supporting the domestic economy through the shock from COVID-19.
