Daily Commentary BY THE CURVE TEAM –

Monetary Policy and Government at Fore

11th of September, 2020

The microscope continues to be put on the roles of the RBA and government for an economic recovery.

Starting with monetary policy, there continues to be talks of conventional policy being replaced, especially by the Term Funding Facility (TFF). Already, the actual interbank cash rate is below the target 0.25%, which bucks the trend of the last 10 years. The actual transactions of RBA repos in their daily market operations has also reduced substantially.

The impetus for these changes has been the ample liquidity made available by the RBA in their daily market operations, yield curve target and TFF. With the TFF being expanded last week and being at a rate of 0.25%, it has essentially set a ceiling for the cash rate at least until June when it is set to expire. This makes the cash rate target and daily market operations much less important to where the actual interbank cash rate will sit.

Whether the RBA will further ease their policy remains in question. They have the option to expand their yield curve target to tenors beyond 3 years. They could also lower the TFF rate lower than 0.25% and or the actual cash rate target.

Ideally, the RBA would not have to ease their policy further, which would be more likely if the government took advantage of low rates and spent. The AOFM has already started raising significant sums for the federal government, and state governments have begun increasing their funding as well. Last week Queensland Treasury Corp announced they would issue $19 billion of new debt during 2020-2021 and Western Australian Treasury yesterday raised another $405 million. This week alone the AOFM have issue 5.1B of debt with bids in these auctions totalling well over 25bn.

State governments have been in disarray in the past few days though, which will hinder government’s ability to reform and focus on their spending plans. The NSW government’s coalition is in jeopardy today, with Premier Berejiklian putting an ultimatum to the Nationals Leader to either stand with the coalition or be removed from office. Queensland are also coming under pressure with discretionary border exemptions raising the ire of many. To round off political pressure along the eastern seaboard Victorian Premier Andrews is also under fire with lockdown measures still in force.

The quicker there is stability in the political landscape the more likely we will see meaningful reform and spending to assist the economic recovery. This would ease the pressure on the RBA and relieve concern for consumers.