RBA readies for more action

Executive Summary

• The Reserve Bank of Australia’s (RBA) monetary policy rhetoric has become more dovish over the past several weeks, opening the door to further easing. RBA Governor Philip Lowe and Assistant Governor Christopher Kent have hinted at the possibility of further interest rate cuts or bond purchases in support of its employment and inflation goals. In addition, the RBA’s October minutes showed policymakers expected further monetary easing could gain traction as the economy re-opens from COVID lockdown measures.
• After a resurgence in COVID cases across Victoria, the spread of the virus appears to have slowed, allowing the government to make progress toward the re-opening of its states and borders. Despite these efforts, the nature of the recovery still remains uncertain and is likely to remain uneven.
• Indeed, that uncertain and uneven nature of recovery is reflected in some economic figures. The Australian economy is recovering, but still has some way to go before it recoups the full losses from the first half of this year. The labor market is a notable weak spot, as the lockdown in Victoria weighed heavily on employment and hours worked in the state, while trends in retail sales and confidence surveys are mixed.

We now expect the RBA to announce further monetary policy easing at its November 3 meeting, by cutting its Cash Rate and three-year yield target 15 bps to 0.10%, as well as announcing further quantitative easing measures. Specifically, we look for increased bond purchases of around A$75B (or ~3.8% of GDP).

RBA Comments Signal Further Monetary Easing

The Reserve Bank of Australia has repeatedly indicated it expects fiscal and monetary stimulus will be required for some time to support economic recovery, and more recently has said it will consider how additional easing could support employment as the economy re-opens. Indeed, the latest comments from the central bank have been more dovish in tone. RBA Governor Lowe signaled that the central bank board is willing to consider further easing, including purchases of longer-dated bonds, to support employment, incomes and businesses in Australia. He said the RBA wants to see more than just “progress towards full employment” and views addressing high unemployment as a priority. Meanwhile, RBA Assistant Governor Kent said that it is possible for short-term rates to fall below zero and more broadly noted there was room for further compression in short-term rates. We also view the RBA’s October monetary policy minutes as generally dovish, as those minutes said further monetary easing would likely gain more traction than had been the case earlier. It also reiterated that addressing the high unemployment rate remains an important national priority.

Since March, the RBA has adopted several measures aimed at supporting economic recovery and countering the negative economic effects of COVID. The RBA reduced its Cash Rate close to zero, at just 0.25%. The central bank’s other measures also included initially establishing an A$90B Term Funding Facility (TFF) in March for banks to access three-year funding, a facility that was recently expanded to A$200B and extended through June 2021. Additionally, the RBA began targeting a yield on the three-year Australian government bond of around 0.25% through purchases of government bonds in the secondary market. So far the RBA has purchased A$63.3B of bonds in support of that objective.

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