The RBA has opened November with a cup day cut, slashing rates to an all-time low of 0.1 per cent in a move first flagged in October. More importantly, the RBA has now embraced unconventional monetary policy with its decision to launch a fully-fledged quantitative easing program that will see it buy $100 billion of government bonds of maturities of around 5 to 10 years.
“At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic,” said RBA Governor Philip Lowe.
“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs. Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago. Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.”
The bond purchases will take place over the next six months, with the first auction to be held for Australian government securities on Thursday. The RBA plans to hold auctions three times a week – Monday, Wednesday, and Thursday – and anticipates that it will purchase about $5 billion a week.
In a press conference after the announcement, Governor Lowe stressed that the RBA was not directly financing government expenditure.
“It is important to point out that the bonds purchased by the RBA will have to be repaid by the government at maturity,” Governor Lowe said.
“They will have to be repaid in exactly the same way as would occur if the bonds were held by others. The same is true for the ongoing coupon payments on the bonds.”
The RBA also warned that it will not increase the cash rate until actual inflation is within the 2 to 3 per cent range.
“For this to occur, wages growth will have to be materially higher than it is currently,” Governor Lowe said.
“This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least three years.”
While the pressure was on for a budget day cut in October, the RBA instead adopted a wait-and-see approach as it worked to understand the impact that the budget measures would have on the Australian economy. However, it remains unclear whether ultra-low interest rates and large-scale asset purchases will have a substantial impact on the recovery, with the RBA itself noting that the efficacy of monetary stimulus was effectively exhausted after its cut to 0.25 per cent.
