RBA Cuts Rates and Increases QE Purchases for at Least 6 More Months

As expected, RBA announced further monetary easing at today’s meeting. RBA cut the cash rate to 0.1%, from 0.25% previously. Similarly, the target for the yield on the 3-year government bond yield and the interest rate on new drawings under the Term Funding Facility were also lowered to 0.1%. Meanwhile, the central bank also cut the interest rate on Exchange Settlement balances (the Australian equivalent to US interest rates on excess reserves) to 0. On asset purchases, RBA announced to buy AUD100B worth of government bonds of maturities of around 5 to 10 years over the next 6 months, and then review the need for more purchases “in light of the evolving outlook for jobs and inflation”.

The central bank acknowledged that “the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago”. It added that “positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria”. RBA also noted “GDP growth is expected to be around +6% over the year to June 2021 and +4% in 2022”. These signals a +2 pps upgrade from the August’s forecasts through 2Q21 and no change to 2022. The members reaffirmed that “addressing the high rate of unemployment as an important national priority”. They admitted that “the unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10% expected previously. At the end of 2022, the unemployment rate is forecast to be around 6%”. Moreover, RBA suggested that  the “extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years”.  Core CPI will likely hover at around +1% in 2021 and 1.5% in 2022″.

On the monetary policy outlook, the central bank reiterated the guidance that “the Board is not expecting to increase the cash rate for at least three years”. Policymakers also suggested that the size of the QE program was under review and contingent on the outlook for jobs and inflation. They also pledged to “do more if necessary”. Since RBA has ruled out negative interest rate, we expect it has done with rate cut this month. While policy rates at the current levels will stay unchanged for the years ahead, the central bank will focus on expanding the size of QE in case more easing is needed in the future.