RBA closes $36bn in QE transactions

The Reserve Bank of Australia (RBA) has held its monthly monetary policy board meeting, in which for the first time in history, a cut to the cash rate was not considered as an option to stimulate the domestic economy.   

As expected by analysts, the cash rate was held at 0.25 per cent, with RBA governor Philip Lowe previously stressing that the central bank had “no appetite” for negative interest rates.

However, the RBA did discuss targets relating to unconventional measures announced following its emergency board meeting last month.  

The measures included the commencement of quantitative easing (QE) through the purchase of government bonds in the secondary market and the launch of a $90-billion term funding facility (TFF).

In a statement released by the RBA following yesterday’s board meeting, governor Lowe confirmed that since commencing QE, the central bank has purchased a total of $36 billion in government bonds.

Mr Lowe said the RBA remains willing to provide further support through government bond purchases but would reconsider the frequency of such moves if conditions improve.

“The bank will continue to promote the smooth functioning of these important markets,” he said.

“If conditions continue to improve, though, it is likely that smaller and less frequent purchases of government bonds will be required.”

Mr Lowe noted that the RBA would “do what is necessary” to achieve its three-year bond yield target of 0.25 per cent (cash rate), adding that the target would not be lifted “until progress is being made towards the goals for full employment and inflation”.

Reflecting on the RBA’s monetary policy statement, AMP chief economist Shane Oliver said the QE program would help put downward pressure on fixed mortgage rates and the Australian dollar.

“This is aimed mainly at lowering longer-term borrowing costs in the economy, such as fixed mortgage rates, and we saw this three weeks ago with banks lowering their fixed mortgage rates,” he said.

“The boost to the money supply from this money printing also puts downwards pressure on the value of the Australian dollar compared to what otherwise would be the case, and the quantitative easing helps support the flow of money through the economy and helps boost risk taking by forcing bond holders into more risky investments.”

Mr Oliver noted that as a result of the RBA’s QE measures, 10-year bond yields have fallen from over 1.5 per cent to 0.8 per cent.

The RBA also noted the progress of its $90-billion TFF, revealing that the first drawing from the facility was made on Monday (6 April).

The central bank reiterated that the TFF would help lower funding costs across the banking system and “provides an incentive for lenders to support credit to businesses, especially small and medium-sized businesses”.

AMP’s Shane Oliver observed that the TFF has enabled lenders to lower business rates and provide repayment holidays of up to six months for affected business customers.

RBA governor Philip Lowe also noted that the central bank would continue to provide liquidity support to the banking system through repurchase (repo) transactions on the overnight money market.  

“The bank has injected substantial liquidity into the financial system through its daily open market operations to support credit and maintain low funding costs in the economy,” Mr Lowe said.

“It will continue to ensure that the financial system has sufficient liquidity.”

However, Mr Lowe said that given the “substantial liquidity” already in the system and the commencement of the TFF, the repo transactions are “likely to be on a smaller scale in the near term”.

“Operations at longer terms will continue, but the frequency of these operations will be adjusted as necessary according to market conditions,” he said.

Mr Lowe concluded by stating he is confident that the coordinated monetary and fiscal response to the economic impact of the coronavirus, along with complementary measures taken by Australia’s banks, would “soften the expected contraction and help ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed”.

“These various responses are providing considerable support to Australian households and businesses through what is a very difficult period,” he said.

“The Australian financial system is resilient. It is well capitalised and in a strong liquidity position, with these financial buffers available to be drawn down if required to support the economy.”

“The board is committed to doing what it can to support jobs, incomes and businesses as Australia deals with the coronavirus.”

[Related: RBA urged to expand QE program]