Daily Commentary BY THE CURVE TEAM –

RBA Easing Expectations Grow

21st of October, 2020

The RBA minutes for the October meeting has increased the expectations of further easing.

As in Chris Kent’s speech yesterday prior to the release of the minutes, monetary policy decisions cannot simply be boiled down to moves in the cash rate target. Decisions now involve the term funding facility (TFF), the 3-year government bond target and quantitative easing.

Piecing together Lowe’s speech from last week, the markets consensus is that there will be quantitative easing targeting longer dated (5-10 years) government bonds as well as a reduction in the TFF, 3-year government bond target and cash rate to 0.10%. Negative rates and direct foreign exchange intervention remain off the cards.

Motivating the easing bias from the RBA are multiple factors. First and foremost is their belief that lower interest rates across the economy will be beneficial for an economic recovery. Although they are conscious of lower interest rates hurting the earnings of savers and pushing people into more risky assets in search of yield, the RBA seems to view the cost of this as being outweighed by the economic benefits of low rates.

Second, the RBA are conscious of the exchange rate. They have made clear a lower exchange rate would be beneficial to the economy. With the New Zealand and UK central banks continuing to be dovish by flirting with negative rates, there is more of a justification for the RBA to ease further as well to keep the exchange rate lower.

Just yesterday the Reserve Bank of New Zealand preached the efficacy of negative rates. The Bank of England emphasised their fears for the state of the economy and deflationary pressures. Both updates will put more pressure on the RBA.

It seems inevitable that there will be further easing but the timing remains less clear. Lowe’s speech and the minutes yesterday stated that it was ‘reasonable to expect that further monetary easing would gain more traction than was the case earlier’ as ‘the economy opens up’.

The RBA have not defined their view of the economy ‘opening up’. If they view it as Victoria easing lockdowns, which is gradually occurring, then the case for easing either in two weeks or in December will be stronger. If it is defined as international borders opening up, when a lower exchange rate would be far more influential on economic activity, then easing would likely occur next year.

Even if their preference is to wait until international borders open up, there will be pressures to do more before this. A laggard economy and other central banks pulling the trigger early may force the RBA’s hand, hence the consensus of the RBA easing sooner rather than later.

Also out yesterday were payrolls for the two weeks to October 3. They were down 0.9%, which likely reflects JobKeeper eligibility amendments. 0.7% points of the fall came in the second week, which is the first piece of data confirming that JobKeeper amendments will hit jobs.

S&P also gave an update yesterday to affirm Australia’s triple A rating being on negative watch. Assuming the deficits we have at the moment are tapered back over the next few years, S&P are comfortable with government financing. Should the scenario deteriorate, and deficits not be pared back as quickly as expected or get worse, then the rating outlook will likely change for the worse.

Josh Stewart

Client Relationship Manager