In addition to cutting the official cash rate to a new record low, the RBA has introduced a number of elements to prop up the economy including the purchase of $100 billion of government bond of maturities of around five to 10 years over the next six months, a reduction in the interest rate on exchange settlement balances to zero, a reduction in the interest on new drawings under the Term Funding Facility to 0.1 of a percentage point, and a reduction in the target for the yield on the three-year Australian government bond to around 0.1 of a percentage point.
Under the program to purchase longer-dated bonds, the RBA said it will buy bonds issued by the Australian government and by the states and territories, with an expected 80/20 split.
Those bonds will be bought in the secondary market through regular auctions, with the first auction to be held this Thursday for Australian government securities.
Further, the RBA said it remains prepared to purchase bonds in whatever quantity is required to achieve the three-year yield target, and that any bonds purchased to support this target would be in addition to the $100 billion bond purchase program.
Responding to the decision, CreditorWatch chief economist Harley Dale said the RBA is now out of ammunition in terms of the official cash rate.
“Any further support the Australian economy requires will have to come from fiscal policy and quantitative easing, but then fiscal policy has been doing most of the heavy lifting in 2020,” Mr Dale said.
“While it can be argued that this latest interest rate cut will do little to stimulate demand, it will likely feed through to lower fixed-rate mortgages. That can provide a powerful charge to the economic recovery.”
RBA governor Philip Lowe said in a recent speech that further monetary policy easing would be on the way as Australia embarks on its economic recovery.
Further, with the Australian Bureau of Statistics revealing a rise in CPI following its largest quarterly slump in 72 years, the RBA is likely to ride the rising consumer confidence wave by further encouraging spending, with the ultimate goal to target annual inflation of 2 to 3 per cent.
AMP chief economist Shane Oliver said the commentary from the RBA provided a strong signal that further easing is imminent.
“The RBA’s own forecasts show that it will not achieve its employment and inflation objectives over the next two years, and so, further easing is required to help address this,” Mr Oliver said.
“Recent RBA commentary has provided a strong signal that further easing is imminent. We expect this to take the form of a rate cut to 0.1 [of a percentage point] and broad-based quantitative easing.”
