The Reserve Bank of Australia Board at today's November meeting 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, to 0.1% from 0.25%. In addition, the Board announced a quantitive easing (QE) program with a target of $100bn of purchases of Australian and state government bonds in the 5 to 10-year maturity range over the next 6 months. Today's decision statement from Governor Philip Lowe noted that this package of measures was intended to "support job creation and the recovery of the Australian economy from the pandemic". Further context was then provided in a special post-meeting speech from Governor Lowe in which he outlined that with the economic recovery appearing increasingly likely to be "uneven and drawn out" more policy support was required.
The cut to the Bank's rates structure was widely expected, though the QE program was more aggressive than had been anticipated. The consensus view of markets was for a program of $100bn, though over a longer duration (of around 1 year), while my expectation as per the preview note was for a different configuration of a flexible open-ended commitment to QE purchases in the 5 to 10-year range. Importantly, Governor Lowe noted: "The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation" and that it is "prepared to do more if necessary". Clearly, with rates now having fallen to as low as the RBA is comfortable with, QE purchases now become its marginal tool of choice should the prevailing economic conditions justify further policy easing.
On the QE program, the plan, at least initially, is for the purchases to total around $5bn per week, comprising $4bn of Australian Government Securities (AGS) via auctions on Mondays (focusing on maturities of 5-7 years) and Thursdays (maturities of 7-10 years), and $1bn of state government bonds or semis on Wednesdays (alternating between short and long-dated maturities on a weekly basis) (full details here). This 80/20 split of AGS to semis is in keeping with what has occurred so far in the $63.3bn of purchases made by the RBA in support of its 3-year yield target. Any future purchases directed at defending the 0.1% target on 3-year AGS will fall outside the $100bn QE envelope. The RBA wants to retain flexibility in the QE program and has said it will adjust the "size, composition and timing" of purchases, pledging also to buy bonds outside the 5 to 10-year range, to support effective market functioning.
Turning to the changes in the RBA's rates structure, for the Term Funding Facility the new rate of 0.1% will apply to drawdowns from Wednesday onwards but all other parameters remain unchanged (see here). As the situation currently stands, banks will have access to a further $114.2bn in 3-year liquidity fixed at 0.1% out to the end of June 2021. Meanwhile, with the target for the cash rate falling to 0.1%, this prompted a downward adjustment to the rate banks will earn on deposits held at the RBA. Previously, banks' exchange settlement balances attracted a rate of 0.1% but this has now been lowered to 0%. Markets had anticipated this would fall to a range between 0.01% to 0.05%.
All considered today's measures from the RBA signal a significant step up in the monetary impulse to assist the domestic economy in the recovery from the pandemic crisis. The RBA's balance sheet is now on track to expand considerably, from $300bn (around 15% of GDP) currently to well above $500bn (north of 25% of GDP) by mid next year — this from a pre-pandemic level of just below 10% of GDP — as the QE program adds to the yield-target purchases and Term Funding Facility drawings. This will assist the recovery by placing downward pressure on government bond yields across the curve and on the level of the exchange rate.
