RBA Sees Policy Gaining More Traction as Economy Reopens

(Bloomberg) -- Australia’s central bank said further policy easing is likely to “gain more traction” as restrictions are lifted across the economy and agreed the governor would flag the shift to targeting actual over forecast inflation.

“As the economy opens up, members considered it reasonable to expect that further monetary easing would gain more traction than had been the case earlier,” the Reserve Bank of Australia said in minutes of its October meeting in Sydney Tuesday. “Some parts of the transmission of easier monetary policy had been impaired as a result of the restrictions on activity.”

The board reiterated that addressing high unemployment was an “important national priority.” Australia’s jobless rate advanced to 6.9% in September and the central bank said it was now expected to peak below the 10% level projected in the August update of economic forecasts.

The RBA has signaled it’s considering further measures to support the recovery as the southeastern state of Victoria reopens from a hard lockdown. Policy makers expanded a bank lending program in September, delivering additional stimulus after having cut the cash rate to 0.25% and set the same level as the three-year bond-yield target in March.

What Bloomberg’s Economists Say

“The clear takeaway from the RBA minutes is that as Australia’s covid-19 restrictions ease, so too will monetary policy. Recent communication from the RBA has seen forward guidance intensified on a number of fronts, both extending the duration of ultra-low rates, as well as honing the focus onto the underlying source of sustained underlying inflation: a tight labor market. We think the next move is a further cut toward zero, with progress on winding back covid restrictions suggesting a move in November.”

James McIntyre, economist

The minutes showed that the board decided the forward guidance switch toward placing “more weight on actual, not forecast, inflation in its decision-making,” would be communicated by Governor Philip Lowe in his speech on Oct. 15, to allow for greater context than “was possible in the post-meeting statement.”

The board discussed the possible impact of further easing on financial stability, noting it would actually help reduce risks “by strengthening the economy and private sector balance sheets,” through the reduction of non-performing loans.

“This benefit would need to be weighed against any additional risks as investors search for yield in the low interest rate environment,” the RBA said, specifically highlighting the housing market.

The board also noted the larger balance sheet expansions by other central banks “was contributing to lower sovereign yields in most other advanced economies,” the minutes showed. Members discussed “the implications of this for the Australian dollar exchange rate.”

Balance Sheet Tools

Earlier Tuesday, Assistant Governor Christopher Kent, who oversees financial markets, said the RBA’s shift to tools beyond the cash rate had made it more difficult to gauge its stance on monetary policy. He said looking at their balance sheet was a good way of assessing the extent of stimulus.

Kent went on to say that short-term rates could fall below zero, prompting the Australian dollar to decline against all its major peers. The currency slipped to 70.43 U.S. cents, the lowest since Sept. 28, and Aussie bank bill swap futures ticked higher.

Australia’s currency has surged about 23% from a nadir in March as much of the nation exited lockdown and reopened earlier than anticipated and commodity prices jumped on stimulus by key trading partner China.

“While members noted that the Australian dollar exchange rate was broadly consistent with its fundamental determinants, a lower exchange rate would provide more stimulus to the Australian economy in the recovery phase,” the RBA said in the minutes.

Shortly after the release of the minutes, S&P Global Ratings affirmed Australia’s long-term foreign currency debt rating at AAA, while maintaining the negative outlook that reflects the deterioration of the country’s fiscal position.

Kent, in his speech, pushed back against critics who maintain the RBA hasn’t done as much as global counterparts to support the economy.

He said that the expansion of the bank’s lending facility -- the Term Funding Facility -- provided stimulus in three forms:

• Lending to firms and households at cheap rates;
• Buying bonds issued by a government or a business; and
• Repaying their maturing debt, which also has the effect of lowering the yield on Australian dollar assets

He said the “easing in financial conditions associated with these balance sheet tools has been greater now than was the case during” the 2008 financial crisis.

“Taken together these communications reaffirm our view that the RBA will ease in November,” Goldman Sachs Group Inc. economists led by Andrew Boak said in a research note. “We continue to expect a cut in the cash rate, yield curve target and the TFF rate by 15 basis points to 0.1%, as well as the announcement of an approximately A$100 billion QE program.”

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