Australia’s central bank is expected to cut interest rates to a fresh record low, reduce its three-year yield target and unleash further bond buying as it tries to turbo-charge a recovery now that the country is released from lockdown.
The Reserve Bank of Australia will cut the cash rate to 0.10% from 0.25% and set its yield curve control and bank funding facility at the same level, while reinforcing no tightening for three years, economists predicted ahead of Tuesday’s meeting. They also anticipate purchases of longer-dated government bonds to narrow the differential with developed-world counterparts and put downward pressure on the currency.
The RBA has come under fire for failing to follow up its initial easing at the height of market dislocation. It did expand a bank lending facility in September, but has otherwise stayed on the sidelines with modest bond purchases since May. The three-year yield has traded below its 0.25% target since September on expectations of further easing.
With Victoria now emerging from its second, harsher lockdown, the RBA is set to do more. The central bank has maintained it was better to deploy additional stimulus when doing so would gain maximum traction.
“The recovery is unlikely to be robust enough to achieve the RBA’s policy goals,” said James McIntyre, Australia economist at Bloomberg Economics. “With a sluggish demand outlook and a weak labor market justifying further policy support, it’s difficult for the RBA to make a case to hold back.”
As part of lowering borrowing costs, Governor Philip Lowe is expected to reduce the rate paid on commercial bank deposits in exchange settlement accounts at the RBA to 0.01% from 0.10%.
The main debate of Tuesday’s meeting is over the shape of any longer-dated bond program.
Economists see scenarios that include:
- The RBA moving to a traditional quantitative easing program by announcing it will purchase a set value of bonds over a set time period — economists suggest this could be upward of A$100 billion ($70 billion)
- Reverting to what it did in March and April, when the RBA was buying bonds along the curve to address market dysfunction without a set target. This provides maximum flexibility, an option the RBA traditionally prefers
- Setting yield targets on bonds in the five-to-10-year range, complementing its three-year target
“Given its first foray into QE, the RBA is likely to opt for a program towards the lower end of a A$100–180 billion range,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at the Royal Bank of Canada.
Experience shows QE programs “are almost always upsized,” Ong added. State and territory government bonds “are likely to be part of any QE program,” she said.
The governor said in a question-and-answer session last month that Australia’s 10-year yield was much higher than developed-world counterparts and he was trying to understand whether this was a result of the bank not purchasing bonds in the 5-10 year range since March.
Lowe also said the bank was working through whether bringing down longer-dated rates would help generate more jobs — at the heart of his policy objective. The most obvious channel would be a lower exchange rate. The Australia dollar has risen more than 22% since its mid-March nadir.
Australia’s jobless rate is currently 6.9% and the nation’s Treasury expects it to peak at 8% later this year. RBA No. 2 Guy Debelle suggested last week that the economy likely exited the recession in the third quarter as growth in the rest of the country overcame the drag from Victoria state’s lockdown.
Data Monday showed job advertisements surged 9.4% in October, and a separate release recorded a 15.4% jump in building approvals in September, some 10-times economists’ forecast. Australian home prices also advanced in October for the first time in six months as the virus is brought under greater control.
The difficulty is likely to emerge early next year as the government’s wage-subsidy program is wound up and a burst of spending following the lifting of restrictions abates.
“The real losses are likely to come in the middle of next year,” Australia & New Zealand Banking Group Ltd. Chief Executive Officer Shayne Elliott said Thursday. “Why? Because there’s always a lag, because people can hang on, going to wait and see how Christmas trading goes, going to wait and see how borders open up.”
He’s skeptical about the impact of further easing, noting credit is already cheap. “If home owners don’t want a mortgage at 2.5%, it’s not clear to me they’ll want one at 2.4%,” he said.
For now, households are cashed up from a combination of government stimulus and limited spending options during lockdown, but are choosing to pay down debts and build up buffers.
“Policy response lags mean that now is the right time for the RBA to move,” said McIntyre.