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RBA prepares unconventional weapons

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By Lachlan Maddock
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2 minute read

The RBA will make a decision this week on whether to take the plunge on unconventional monetary policy as markets are roiled by the coronavirus pandemic.

As the RBA slashed rates over the last year, anticipation grew that it would soon need to use unconventional monetary policy to get the Australian economy out of the doldrums. That anticipation only increased during the bushfire emergency, and as the coronavirus begins to impact supply chains and markets, it appears that the RBA now has its finger on the trigger.

“Australia’s financial system is resilient and it is well placed to deal with the effects of the coronavirus,” Governor Philip Lowe said in a statement.

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“At the same time, trading liquidity has deteriorated in some markets. In response, the Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system.”

The RBA will announce further policy measures on Thursday.

The bank has previously indicated that it would only consider quantitative easing if rates reached 0.25 per cent, opening up the possibility of an emergency cut on Thursday. 

The bank has already substantially widened its regular repo operations in an attempt to pump liquidity into a market experiencing chronic shortages. On 13 March, the bank lent $8 billion for periods ranging from 17 to 95 days, and announced on 16 March that it would offer six-month repo operations for “as long as market conditions warrant”. 

The move follows drastic action by other central banks around the world. The RBNZ cut rates by 75 basis points to 0.25 per cent and indicated that it could also launch a quantitative easing program, while the Fed has already pulled the trigger, announcing that it will increase its holdings of Treasury securities by $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. 

RBA prepares unconventional weapons

The RBA will make a decision this week on whether to take the plunge on unconventional monetary policy as markets are roiled by the coronavirus pandemic.

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