QE measures ‘not yet a given’: ANZ Research

Due to highly uncertain domestic and global economic conditions, analysts are expecting the Reserve Bank of Australia to cut the official cash rate once more in April, bringing the cash rate to a record low of 0.25 per cent.

Following the likely cut in April, the RBA is expected to retain an “explicit easing bias”, and therefore look towards the implementation of quantitative easing (QE) measures, according to ANZ Research.

According to David Plank, head of Australian Economics at ANZ Research, while it is expected that the central bank will not consider bringing interest rates into negative territory, QE is also not yet a “given”, although the prospect is “very real”.

According to a report released in late 2019 by ANZ Research, the “hurdle” for implementing QE measures is high, however, such forecasts preceded the economic fallout of the global COVID-19 outbreak. 

A further cut to the cash rate in April, in addition to the government’s fiscal stimulus package in response to COVID-19 and any further stimulus delivered within the budget in May, could be enough to delay or avoid the move to QE, according to Mr Plank.

“But we expect the RBA to prepare on the basis QE may be required soon,” he said.’

Previously, the RBA has discussed that QE measures “might be considered” should they be required, which has likely already had a positive effect on the performance of the Australian dollar in the global market, Mr Plank stated.

According to ANZ Research, the most common form of QE is for a central bank to “target a specific quantity of bonds” to purchase, with the quantity usually specified well in advance – often purchased in the form of reverse tender.

However, this may not be the course of action for the RBA, based on recent commentary.

Instead, as Mr Plank suggests, the RBA may choose to target the price (yield) of bonds, rather than the quantity, a strategy employed by the Bank of Japan in 2016.

This strategy would require the central bank to commit to the purchase of any level of bonds which is required, in order to achieve its yield target.

“A key advantage of yield targeting is that it might be more effective than quantity targeting in achieving a particular outcome, in terms of bond yields,” Mr Plank said.

“But under yield targeting, the negative impact on market liquidity is much greater, with adverse implications for other market participants.”

[Related: Fed pulls emergency lever amid coronavirus fears]