Daily Commentary BY THE CURVE TEAM –

Lowe Justifies QE Expansion

4th of February, 2021

Governor Lowe justified the RBA’s decision to expand QE in his speech yesterday.

Lowe gave three factors that were considered in the decision: ‘the effectiveness of the bond purchases, the decisions of other central banks; and most importantly, the outlook for inflation and jobs.’

The RBA deemed that rates and the Australian dollar were lower than they otherwise would have been if not for QE, as was referenced in Tuesday’s statement. They assume that this is positive for inflation and jobs and is indicative of the efficacy of QE.

Crucially, actions of other central banks are forcing this action. If not for other central banks running QE programmes, the RBA would have no need for it. So long as other countries have QE, the RBA will feel pressure to maintain theirs.

Also, Lowe confirmed that the Term Funding Facility will not be extended in June. Although this would represent a form of tightening of monetary policy there is around $100 billion left in the TFF to be drawn down. The next viable means to tighten policy will be the three-year yield curve target, as the RBA will decide whether to peg the November 2024 bond to 0.10% rather than the April 2024 towards the end of the year.

Dwelling approvals for December were released yesterday. Approvals were up 10.9% for December, leaving it 22.8% higher than last year and 57% higher than covid lows.

Grants of $25 000 for new homes expired in December, hence the surge in December. $15 000 grants are still available through to March, which should keep approvals strong at least until then.

Josh Stewart

Associate - Money Markets