Daily Commentary BY THE CURVE TEAM –

Minutes Reveal Logic

17th of February, 2021

The RBA Minutes for the February Board meeting revealed the logic to expanding QE.

On February 5, the RBA were grilled by parliament for their recent decisions. One such issue raised was that the meeting minutes were inadequate in communicating the various views and opinions within the RBA.

In the first publication since then, the Minutes explained the reasoning behinds the RBA’s decision to expand QE and keep their other tools unchanged. As expected, the outlook for inflation and unemployment were strong determinants in the decision.

As was the exchange rate. Asset prices were also a motivation to continue to inject liquidity into the system, but they are ‘acknowledging the importance of closely monitoring risks in asset markets’.

QE was the preferred means for the RBA as they view this as the most effective way to keep the dollar lower, especially as other central banks have expanded their QE programs. They also estimate that long end government bond yields are around 30 basis points lower than without the QE programme.

This is especially relevant, as upward pressure on long term government bonds is becoming more apparent. The RBA noted this in the minutes, and overnight the US 10 year treasury was up 8 basis points to 1.29%, which is the highest in close to a year.

As vaccines are distributed and economies open up, growth and inflation outlooks will continue to improve, which will continue to put upward pressure on these. The RBA’s aim of keeping rates and government financing costs low may be difficult if market exuberance remains.

Josh Stewart

Associate - Money Markets