Daily Commentary BY THE CURVE TEAM –

Lower Rates on RBA’s Agenda

23rd of September, 2020

The Deputy Governor of the RBA Guy Debelle spoke yesterday and made clear further policy easing was on the RBA’s agenda.

The RBA had already said in their September meeting and minutes that they would continue to consider what further actions they could take to support the economy. This signalled a change of intent from being content with their current policies.

Yesterday’s speech by Debelle gave more colour on why and how they would ease further. In the section of the speech about other options for monetary policy, he cited the outlook for inflation and employment as ‘not consistent with the Bank’s objectives over the period ahead’.

Since the pandemic in March, the RBA seemingly accepted that they would not be able to meet their targets for inflation and employment. They prioritised financial stability in the early part of the pandemic and keeping liquidity plentiful in the aftermath of the volatility.

Yesterday signalled that they are no longer content to see inflation and employment continue to undershoot. The two most viable options to further ease monetary policy are buying government bonds further along the curve than 3 years and lowering ES account rates, the three-year yield target and the TFF rates.

Buying out further along the yield curve would aim to bring longer term rates across the economy down. This could see investors switch to foreign assets to receive a higher yield, which would depreciate the Australian dollar.

In the RBA September board meeting minutes, the RBA said a lower Australian Dollar would help stimulate the economy. Yesterday Debelle again said ‘a lower exchange rate would definitely be beneficial for the Australian economy’, but the means to depreciate the dollar seems unlikely to be direct intervention given the RBA view the dollar to be fairly valued. Instead it seems they desire their policies to indirectly to depreciate the Australian dollar.

What would have more effect on rates for shorter term investments such as Term Deposits and home loans would be further reducing the cash rate target, TFF rate and 3 year government bond target. Current policy rates have already seen term deposit, bond and home loan rates fall to record lows, so further reductions would likely lead to even further falls.

Markets took the prospect of lowering current policy rates seriously. The 3 year Australian government bond fell from the RBA’s current target of 0.25% to 0.20% after Debelle’s speech.

Payrolls data released yesterday would provide further impetus for the RBA to ease further. They were down 0.1% for the week to September 5, which leaves the figure down 0.7% for the past 4 weeks. Victoria is down 2.1% for the past 4 weeks.

The latest numbers would indicate that next employment update for September could see employment flatlining or slightly reducing. This is less than ideal as September will be the final month before the JobKeeper and JobSeeker payment are amended.

Josh Stewart

Client Relationship Manager