Australia Winds In Firehose as QE Cuts Rates, Calms Markets
Australia’s central bank is scaling back its policy firehosing of money markets as dislocations from coronavirus ease and the bank’s bond-buying program has lowered interest rates across the economy.
In the month since it initiated a quantitative easing program, the Reserve Bank of Australia has purchased more than A$48 billion ($30.3 billion) of federal and state government securities. The program began March 20 with as much as A$5 billion a day in purchases at first, and the pace has declined to as little as one-tenth that level in recent days.
“As conditions in the market have improved and the 3-year yield has settled around 25 basis points, we have scaled back our daily bond purchases,” RBA Governor Philip Lowe said in a speech Tuesday. “We will scale up these purchases again if needed and we will buy bonds in whatever quantity is required to achieve our goals.”
The result is an early vindication for the Australian central bank’s decision to opt for yield-curve control -- targeted bond buying aimed at guiding rates to a certain level -- over quantitative purchases of a set numerical amount. The RBA also sought to soothe a government bond market that swooned as uncertainty about the pandemic crested, but has since stabilized somewhat.
A key measure of money-market stress has eased to its lowest levels since 2007 after the RBA initiated its note purchases, some large daily liquidity injections and a A$90 billion facility to lend to banks. The three-month bank-bill rate last week fell below similar-maturity overnight indexed swaps.
Calmer conditions will allow the central bank to scale back bond auctions to three days a week -- Monday, Wednesday and Thursday -- from five, Lowe said in his speech. The bank might not even purchase bonds on all those days, depending on the 3-year government bond yield and market functioning, he added.
“It is likely, though, that for the foreseeable future we will be purchasing semi-government securities weekly,” Lowe said.
The RBA has bought A$38.75 billion of federal debt and A$9.5 billion of notes issued by states or territories. The Australian Office of Financial Management, the national government’s funding arm, has sold A$25.1 billion of bonds since this time, while issuance from states and territories has totaled about A$22 billion. The AOFM has sold A$13.5 billion in Treasury bills.
In a global environment where major central banks have taken benchmark rates to 0.25% or less -- leaving them virtually without conventional ammunition -- and governments are piling on debt to support their economies, the question of direct monetization has come to the fore.
Lowe acknowledged that RBA bond purchases are affecting the market price the government pays to raise debt, but argued they’re not directly connected.
“Our policies are also affecting the price that the private sector pays to raise debt,” the governor said. “In this way, our actions are affecting funding costs right across the economy, as they should in the exceptional circumstances that we face. But our actions should not be confused with the Reserve Bank financing the government.”
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