Via the excellent George Tharenou and Carlos Cacho:
Economic outlook deteriorated sharply, amid 2nd wave of COVID & restrictions
With the 2nd wave of COVID seeing tighter mobility restrictions in Australia, including an extended ‘State of Disaster’ in Victoria, the economic outlook is deteriorating. Indeed we recently halved Q3 GDP to 0.6% q/q, and still expect just 0.3% q/q in Q4 due to the fiscal cliff. We expect unemployment to lift to 9¼%, while RBA Governor Lowe flagged around 10%. This deteriorating outlook saw more fiscal support from the Australian Government, lifting total stimulus to ~$238bn, or 12% of GDP (much larger than overseas which totalled 5% of global GDP). For the RBA, while their August meeting “maintain[ed] current policy settings”, they restarted bond purchases, with $6bn in the last 2 weeks (now totalling $57bn); albeit this time narrowly targeted at short-end Australian Government bonds (i.e. no Semis, linkers, or longer-dated maturities) to ensure that 3-year bond yields return to the YCC target of 0.25% (after drifting higher in the prior ~month).
What are the RBA’s options? More TFF & ‘proper’ QE now seen most preferred
For now, our base case remains the RBA will keep interest rates on hold for years. However, they are now clearly closer to easing, especially if the lockdown persists beyond September. ‘If necessary’, what else can the RBA do? Updated for Governor Lowe’s recent comments, we dive into the potential options for further monetary policy easing, and their likely order. 1) The RBA is increasingly focussed on the TFF as their main policy tool. We see an increase and extension of the TFF with additional phases (similar to the ECB’s TLTRO program) as the most preferred easing option. 2) We now see the next preferred option is to launch ‘proper QE’, by buying 5-10+ year Government bonds, as well as Semis, to purposely remove duration from the market, and lower longer-term yields (including narrowing the Semis-AGS spread). 3) Cut the cash rate target from 0.25%, to 0.1%. While there would be limited direct benefit, given the actual cash rate is already trading around ~13-15bp, this would probably be combined as a package by also lowering the 25bps rate for the TFF and YCC target. 4) We had also previously expected the RBA would prefer terming out YCC, from 3-years, to 5-years, but we now think that terming out YCC would only be considered if there was a deterioration in the long-term economic outlook such that the RBA expected the cash rate to be on hold for ~5 years. Meanwhile, other options remain much less likely. 5) Buying other assets (i.e. corporate bonds, RMBS, equities). 6) Cutting the cash rate target to negative, which Lowe reiterated remains “extraordinarily unlikely”. 7) Buying foreign assets and/or FX intervention, which Lowe indicated is very unlikely, given he noted ‘it’s hard to argue the AUD was overvalued at the moment’ – unlike the RBNZ which flagged purchases of foreign assets (or FX intervention) to lower the currency.
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