Analysis: What is RBA Standing Ready to Do, If It Needs to Do More?

• Published on
• 01 Jul 2020, 03:33 PM

By Sophia Rodrigues

The Reserve Bank of Australia deputy governor Guy Debelle gave a detailed speech on the central bank’s balance sheet on Tuesday but one line that really stood out was the last one.

“While much of that support is likely to be on the fiscal side, the Reserve Bank will maintain the current policies to keep borrowing costs low and credit available, and stands ready to do more as the circumstances warrant,” Debelle said.

If the RBA stands ready to do more when needed what exactly will it do?

And more importantly, what exactly are the policy options in the RBA’s toolkit given that it has closed the door to the very few options that become available when the policy rate is at its effective lower bound.

WE KNOW RBNZ’S TOOLKIT BUT WHAT IS RBA’S?

In 2018, the Reserve Bank of New Zealand published a bulletin article on aspects of implementing unconventional monetary policy in New Zealand.

Earlier this year, the RBNZ published another document where it discussed principles for using unconventional monetary policy, and the range of tools it is working on. The RBNZ has said it is currently working towards making these tools deployable.

On the other hand, the RBA has never issued any document on the range of tools in its toolkit. Last year, following the Parliamentary testimony, the RBA published a document with answers to specific questions on unconventional policy but remained vague on which ones it might use if required in future.

Therefore the closest insight into RBA thinking on unconventional policy is a speech by Governor Philip Lowe in November last year.

In the speech, Lowe said negative interest rates in Australia are extraordinarily unlikely, and as recent as Tuesday, that view has not changed. Hence this policy option could be excluded.

Lowe also said the RBA has no appetite to undertake outright purchases of private sector assets as part of a QE program. The only private-sector related policy the RBA recently introduced was to expand the range of corporate bonds that it will accept as collateral in its daily open market operations.

In May, at the Parliamentary testimony Lowe said, “My appetite for buying private sector assets is very limited—that comes with a whole bunch of governance issues.”

This means the RBA has not yet warmed up to the idea of buying private sector assets, though Lowe’s language suggests he is not completely ruling it out like he did last year.

That leaves Large Scale Asset Purchases, flexible market operations and forward guidance.

The RBA is already providing liquidity as needed and has said several times it is committed to providing adequate liquidity. In addition, the RBA is providing funding via Term Funding Facility.

The RBA also has forward guidance through the 0.25% target for three-year bonds.  Deputy Governor Debelle reiterated on Tuesday the RBA stands ready to scale up its purchases of government bonds if necessary, to achieve its objective of 0.25% for three-year bonds and to ensure market is functioning effectively.

ONLY LSAP REMAINS

The only tool the RBA has not yet used, and which may be part of its “active” toolkit is LSAP.

In understanding whether the RBA would consider large-scale QE, this line from Lowe’s speech last year may be most relevant. Lowe said international experience “suggests that QE does put additional downward pressure on both interest rates and the exchange rate.”

Also note his comments last month, “The package we've got so far is working. If we had to do more, we could purchase more government bonds, but at the moment our yield curve target is working well, and the Australian government bond market is working as well as it was before the crisis. So, as things stand at the moment, I don't see the need to do any more.”

But when the need arises to do more, it is ikely the RBA would do large scale purchase of government bonds. Debelle likely referred to this policy option when he said the RBA stands ready.

There is also some chance the RBA may consider buying private sector assets but right now it looks no more than a small possibility.

--Contact: sophia@centralbankintel.com