Joye: RBA QE to buy RMBS

From Chris Joye today:

After three years of inertia, a new intellectual paradigm has emerged from within the Reserve Bank of Australia. It has gradually taken form in speech after speech from the governor, Phil Lowe, and his acolytes. And its increasingly lucid logic rubbishes the concerns of critics worried about the consequences of extremely low rates, and our forecast for a sharp rise in national house prices, which is playing out right now.

Yep, the mandate, discovery of secular stagnation, macroprudential controls in hand, ensure it. But:

Treasury has advised Joshua Frydenberg that “given Australia’s financial system is dominated by bank lending to households, it is likely the [RBA] would first consider options aimed at lowering bank funding costs or supporting mortgage funding directly”. “This would involve either buying commercial bank bills or residential mortgage-backed securities,” Treasury continued. “The latter may be particularly attractive as the RBA already holds these assets as collateral as part of its existing operations.”

Treasury further supported our arguments that simply buying government bonds to reduce risk-free yields is unlikely to trigger a wave of public borrowing (because of this government’s prudent commitment to repaying debt) and/or private credit creation (given most interest rates price off short-term bank funding costs, not long-term government bond yields).

No. The RBA should not buy RMBS unless there is a clear need do so in a shortage of available credit which there clearly is not.

It should target instead a lower AUD with local and foreign bond purchases. There will be more long end supply next year as Frydenberg’s surplus collapses alongside bulk commodities.

I don’t know whether Mr Joye is front-running the purchase of RMBS or believes it is most likely form of QE. Or both!

Alas, given the track record of the RBA and Treasury, he is probably right.

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