Bill Evans: RBA to cut and print Thursday

Via Bill Evans:

Today, the Reserve Bank released a Statement which was aimed at addressing liquidity issues in the Australian financial market.

The liquidity policies were aimed at both the government bond market and the bank funding markets.

Earlier in the day, we saw aggressive policy changes from both the US FOMC and the Reserve Bank of New Zealand.

The RBA Governor’s Statement noted that the Reserve Bank “stands ready to purchase Australian government bonds in the secondary market”.

The Statement indicated that the action was aimed at supporting the smooth functioning of the bond market.

At a recent Conference, on March 11, RBA Deputy Governor Debelle noted that “at the moment we don’t see material disruptions in financial markets. If that were to change we obviously have the capacity to act in the market like we did back in 2008 in terms of ensuring sufficient liquidity to the market. We don’t see the need for that now, but obviously if circumstances change, that might also need to change”.

Clearly from the RBA’s perspective the circumstances have changed. So this action in the bond market is targeted at boosting liquidity in a market that is seen as a “key pricing benchmark for the Australian financial system”.

Other liquidity based policies which were announced include one month; three month; and six month or longer repo operations to support liquidity in bank funding markets.

This action in the bond market is not the Quantitative Easing policy which we have been anticipating will be adopted when the overnight cash rate reaches 0.25% (defined by Governor Lowe as the zero lower bound at a speech on November 26).

In explaining its proposed approach to Quantitative Easing Deputy Governor Debelle pointed out at the same Conference, “So we would talk about the likely future path of interest rates – what is generally known as forward guidance – and to validate that we would be operating in the bond market as necessary to keep government bond rates, or the risk free curve, consistent with our outlook for interest rates”.

It is interesting that the Bank’s first foray into the bond market is based on liquidity but we do not expect that the Quantitative Easing approach has been shelved.

The Governor’s statement today also indicated that: “further policy measures to support the Australian economy” will be announced on Thursday March 19.

Those policy measures are expected to include a lowering of the overnight cash rate from 0.50% to 0.25%.

Quantitative Easing, along the lines described by the Deputy Governor, is also expected to be announced. This would involve the RBA targeting a particular outlook for the risk free curve.

The Governor’s Statement also noted that the RBA and the AOFM are in close liaison. Recall that during the Global Financial Crisis the AOFM purchased a range of mortgage backed securities. A repeat of that successful exercise is also likely to be announced.

Last year Westpac raised the issue of the RBA adopting a similar policy to the Bank of England to support small businesses and households while supporting banks’ funding at a time of excessively low interest rates.

Under the arrangement the RBA would lend long term funds to the commercial banks at a rate close to the overnight cash rate with the funds being tied to loans to business and households.

We understand that in this current crisis a key priority is about ensuring that good companies stay afloat until the crisis has passed and in turn that companies are able to retain their employees.

The Government’s Fiscal Stimulus Package addressed these issues but we think that the monetary authorities, in conjunction with our unquestionably strong banking system, can also play a role.

David Llewellyn-Smith
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Comments

  1. It’s a shame central bankers have been happy to see risk being repriced in all markets by one: the private market of economic ideologies and their fuk*ing asinine belief that you can globalise and liberalise economies and still get to eat your f&*ing cake. Each time they get a sweat on about how badly they’ve f*kced it up again, hurtling ever faster to a bone smashing greeting from hard reality, out comes the public balance sheet to cushion the blow, and they are quietly ushered out to gilded retirement to reflect on the f**ing mystery of it all.

  2. I don’t know why this navel gazing gets such prominence. The planning and narrative fallacies all in one concentrated spot,

  3. It is unfortunate that so many just accept these ineffective proposed interventions by the RBA as the ONLY alternative.

    Have we really lost the power of critical thought and are only capable of digesting self interested pulp from bank economists?

    “.. Recall that during the Global Financial Crisis the AOFM purchased a range of mortgage backed securities. A repeat of that successful exercise is also likely to be announced…”

    It is absurd that the RBA and the AOFM will soon start gaily buying up assets of the Big End of Town to ensure those big babies don’t soil themselves, when the impact of those policies on the real economies is so uncertain and indirect.

    If the AOFM are going to buy mortgages they should be limited to buying mortgages secured by new construction. This is not the time to further encourage speculators loading up on debt to bet on the prices of the existing housing stock.

    If the AOFM and the RBA are in the mood to buy things the RBA should be buying government bonds directly from the AOFM with the proceeds released to the government to increase the tax free threshold immediately for ALL taxpayers to at least $30,000 and increase NewStart and other means tested welfare payments.

    More money left in millions of wallets on every pay day is going to make a much bigger difference to confidence than allowing a tradie to instantly write-off another new fully imported Ute.

  4. Narapoia451MEMBER

    It seems like the answer would be obvious but this are crazy. What impact will this have in AUD?

  5. Just madness, the central banks rush to crush savings rates has caused this crisis, there are no buffers in the system to absorb income shocks. People living paycheck to paycheck with large debts is always going to end in tears.

    • Yessir.

      (but economic text books don’t take account of the ‘savings’ side of the ledger – only the benefits of lower borrowing costs. Funny that!)