Lunatic RBA cheers Aussie dollar to the moon

Via the Lunatic this afternoon:

At its meeting today, the Board decided to maintain the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points. It also decided to increase the size of the Term Funding Facility and make the facility available for longer.

Under the expanded Term Funding Facility, authorised deposit-taking institutions (ADIs) will have access to additional funding, equivalent to 2 per cent of their outstanding credit, at a fixed rate of 25 basis points for three years. ADIs will be able to draw on this extra funding up until the end of June 2021. This extension will ensure that all ADIs continue to have access to the Term Funding Facility after the end of September, when the window for drawings under the initial allowance of 3 per cent of outstanding credit closes. Additional allowances associated with an ADI’s growth of business credit will now also be available until the end of June 2021. Further details are provided in the accompanying notice.

To date, ADIs have drawn $52 billion under the Term Funding Facility and further drawings are expected over coming weeks. Today’s change brings the total amount available under this facility to around $200 billion. This will help keep interest rates low for borrowers and support the provision of credit by providing ADIs greater confidence about continued access to low-cost funding.

The Term Funding Facility and the other elements of the Bank’s mid-March package are helping to support the Australian economy. There is a very high level of liquidity in the Australian financial system and borrowing rates are at historical lows. Government bond markets are functioning normally, alongside a significant increase in issuance. Over the past month, the Bank bought a further $10 billion of Australian Government Securities (AGS) in support of its 3-year yield target of 25 basis points. Since March, the Bank has bought a total of $61 billion of government securities. Further purchases will be undertaken as necessary. The yield target will remain in place until progress is being made towards the goals for full employment and inflation.

Globally, an uneven economic recovery is under way after a very severe contraction in the first half of 2020. The future path of that recovery is highly dependent on containment of the virus. High or rising infection rates have seen a recent loss of growth momentum in some economies. By contrast, in China, economic growth has been relatively strong. In financial markets, volatility is low and the prices of many assets have risen substantially despite the high level of uncertainty about the economic outlook. Bond yields remain at historically low levels. The US dollar has depreciated against most currencies over recent months. Given this and higher commodity prices, the Australian dollar has appreciated, to be around its highest level in nearly two years.

In Australia, the economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now under way in most of Australia. This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy.

Employment increased in June and July, although unemployment and underemployment remain high. The virus outbreak in Victoria and subdued growth in aggregate demand more broadly mean that it is likely to be some months before a meaningful recovery in the labour market is under way. In the Bank’s central scenario, the unemployment rate rises to around 10 per cent later in 2020 and then declines gradually to be to still around 7 per cent in two years’ time.

Wage and prices pressures remain subdued and this is likely to continue for some time. Inflation is expected to average between 1 and 1½ per cent over the next couple of years.

The economy is being supported by the substantial, coordinated and unprecedented policy easing over the past six months. Fiscal policy is playing an important role. Public sector balance sheets in Australia are in good shape, which allows for continued support. Indeed, fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment. In addition, support for the recovery is being provided by Australia’s financial institutions, which also have strong balance sheets and access to high levels of liquidity.

The Board is committed to do what it can to support jobs, incomes and businesses in Australia. Its actions, including today’s extension of the Term Funding Facility, are keeping funding costs low and assisting with the supply of credit to households and businesses. The Board will maintain highly accommodative settings as long as is required and continues to consider how further monetary measures could support the recovery. It will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band.

The Loon is operating miles outside of its mandate. Stop considering and start doing.
David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. And there you have it. They threw in the blood stained towel but it missed the ring and it fell over the opposite side.

  2. To be fair, they do have a mandate to maintain stability of the currency. Phil seems to regard this as on or around 75c.

    • Goldstandard1MEMBER

      Maybe that is an ok target during ‘normal’ times.
      This is far from normal and is like kicking a boxer in the head on the way down after he’s already knocked out!

    • Bit of a pickle eh … strong USD cross … albeit not a peg.

      Then again some mining near and not so far [PNG] is a wee bit like a Breaking Bad car wash … sorry I hear a knock at the door …

  3. happy valleyMEMBER

    The RBA happy clappies are just having a breather from screwing savers – NIRP is just around the corner to get that all-important 1 cent reduction in the AUD?

    • Happy, I’m with you. Just how long do savers need to be treated like pinatas? A low interest rate environment has been the mud in which greedy Australian pigs have wallowed.

      The flip side to this post’s headline is:
      Sadistic RBA cheers as it sticks it up the derrieres of savers and throws petroleum and ethanol on the housing market bonfire.

      • OK hears the rub … in economic parlance the term Savers has nothing to do with peasants savings because its meaningless in the grand scheme of things E.g. Savers is a term which is a reference to Capital liquidity preferences.

        Capiche …

    • Jumping jack flash

      NIRP seems inevitable.
      They cut the rates for 20 years to lower the eligibility for larger and larger piles of debt to repay the existing piles of debt, their interest and have some left over for “capital gains” until they couldn’t cut any more.

      So the logical step is to just keep cutting.

      What’s the alternative? Repay the debt using earnings alone and not with larger piles of debt?
      Unthinkable!

  4. Jumping jack flash

    “…and continues to consider how further monetary measures could support the recovery.”

    which probably means they have absolutely no idea what to do next.

    That MMT stuff is scary, no. He must have liked it much better when all he had to do was blindly lower the cash rate every so often to get the debt growing again.

  5. No matter how smart they may be at the RBA they are outgunned and being outplayed by more agile and less fear based central banks.

    An imperfect plan implemented well is better than a perfect plan never implemented. Someone needs to tell Captain Phil that perfection doesn’t exist.

  6. Australian economy doing well basically untouched by COVID outside of VIC.

    No need to artificially debase the currency.

  7. 75c is pretty much fair value. Waiting for 50c is like waiting for ‘the crash’. Always 12-18 months away.

    • Yes. While I don’t agree with it ideologically, there is a certain logic which goes like this:

      Constant rounds of competitive devaluation mean that everyone is eventually forced to follow suit to make their currencies more competitive ie. whatever the Fed does ..

      Anyhoo, welcome to the joys of a fiat money system with multiple floating currencies — a race to the bottom.

      • Down this road since the GFC and its only resulted in massive inequality. What’s the endgame to this insanity? Either feudalism or the end of fiat. Anyway, at least I own some gold.

          • Do avail us of past precedent in which a hyper deflationary episode occurred. I sense I’m about to encounter a new period of history of which I’d previously not been aware.

          • Your camps favorite propaganda are a prime example, both start with trade shocks which then mess with their FX basket, resulting in a debt deflation spiral.

            Its not like this has been unpacked yonks ago and your acting like you never knew … duh …

        • Owning some gold over the next few years would be very sensible — it actually performs well in periods of both deflation and high inflation. There are a handful of lurkers on these boards who think otherwise, but they can safely be ignored.

          • While it is my opinion that it would be sensible hold some gold going forward it is a fact that gold does well in periods of high inflation and deflation — supported by theory and empirical evidence, normally easily provided, but now too late for tired marsupials. Remind me tomorrow and I’ll avail you of the substance.

  8. This is my favourite:

    “… assisting with the supply of credit to households and businesses.”

    Like ‘eligibility’ is just not among the criteria.

    Those who are most eligible don’t need the funds and those least credit-worthy would take the funds on any terms.

      • What on earth do they have to do with one another? VW have had free reign in the bonds markets for decades. Dog knows I raised enough funds for them myself.

        • And here I thought you were a savvy operator ….

          Look the ECB back filled reserves so banks could loan on cheap terms but as a business would not loan to plebs, hence mobs like Vdub taking the offer to take cheap debt and then use it for stock by backs … becuase its was rational … rim shot … bonuses and the distinctions it offers … eh