Today, the RBA Board is highly likely to announce a significant easing in policy settings when Governor Philip Lowe hands down his decision statement at 2:30PM (AEDT). It is expected that the Board will cut its rates structure by 15 basis points, lowering the targets on the cash rate and 3-year Australian Government bond yield, and the rate on the Term Funding Facility, from 0.25% to 0.1%. This will prompt an adjustment to the rate banks earn on deposits held at the RBA in their exchange settlement accounts, likely falling from 0.1% to 0.01%. The Board is also likely to announce an expansion in the RBA's bond-buying operations to focus on the 5-10 year segment of the yield curve.
Opening the door to these expected moves was a speech from Governor Lowe on October 15 that outlined a shift in the Board's thinking around its forward guidance. The key developments being that it wants to see "more than just progress towards full employment" and that on inflation it would be "putting a greater weight on actual, not forecast, inflation in our decision-making". The signal to take from this is that the RBA is looking to use its policy tools proactively to speed up the recovery in the labour market and that this will remain its focus until such a time that inflation is considered to have returned to be "sustainably" within its target range of 2-3%. With the Board having the scope to cut its rates structure further, this should be expected to be announced today.
Also discussed in the governor's recent speech was the importance of balance sheet expansion given the actions taken by other central banks since the emergence of the pandemic. As Governor Lowe noted: "our balance sheet has increased considerably since March, but larger increases have occurred in other countries". Not following suit could impair the transmission of the RBA's monetary policy stance through either exchange rate effects and/or relatively higher bond yields. To counter this, it is likely that the Board will announce its intention to expand its government bond purchases (including AGS and semis) to maturities in the 5-10 year range, broadening its focus beyond the 3-year segment of the curve associated with its yield target. Markets anticipate the RBA to announce a target for these 5-10 year purchases of around $100bn. My thinking is that the RBA will instead adopt a more flexible approach by giving an open-ended commitment to step into the 5-10 segment as it deems necessary, based on either economic conditions or to support market functioning should the need arise during a time of significant AOFM issuance. Purchases in the 5-10 year range will provide additional support to expanding the RBA's balance sheet beyond its 3-year purchases and the contribution from the Term Funding Facility.