Dr Brendan Rynne, KPMG Chief Economist, comments on today’s RBA announcement

As expected, the RBA kept its settings unchanged, and we do not anticipate any movement in the near future. The RBA has set out to do all it can to boost economic activity and with business investment still weak, it will keep on its current course.

The RBA surprised some last year by seemingly using up all its monetary policy ammunition by November. In our view, it had no other option and although the effectiveness of Quantitative Easing is still playing out it was essential for business confidence that the RBA was seen to be using all the tools at its disposal to support the economy.

It must be remembered that the RBA has been playing a dual game of implementing monetary policy to ensure domestic demand recovers from this pandemic-induced recession, while at the same time looking to ensure Australia’s currency remains competitive, thereby ensuring our exports continue to be attractively priced. It has used QE for both these defensive and competitive monetary policy plays.

Australia has a flexible exchange rate so controlling the exchange rate is not something that policy makers can do easily for any period of time. The RBA has already indicated it is likely to implement another round of QE in 2021 and, if necessary, could target purchases further along the curve to put downward pressure on 5- and 10-yr government bond rates, which may help with the competitiveness of the Australian dollar.

The fact that the RBA has flagged further QE activities suggests it considers QE ammunition has been, and will continue to be, effective in supporting the economy. In fact, the RBA has pulled in ‘reserve ammunition’, which many in the market didn’t think it had based on its traditional playbook, including the further easing of the cash rate to 0.1%. The Bank has shown a preparedness to use unconventional monetary policy and adopt measures we haven’t previously seen it use.

In using unconventional measures it is important that the RBA is alert to unconventional outcomes. While conventional inflation metrics remain largely contained, inflation was higher than expected in December and the RBA will need to watchful that this was due to temporary factors rather than the long-hibernating inflation genie stirring from its slumber.

It would also be particularly prudent for the RBA to remain alert to the consequences of asset price inflation, which we are now seeing in the housing market. The issue is that rising assets prices will further exacerbate the difference between the ‘haves’ and ‘have-not’s in society. Those with assets going into the pandemic will see their wealth rise with the tide; those that didn’t will see the gap widen.

Policymakers are in a difficult position. If QE is distorting asset prices, including housing, then introducing another distortion to address this may simply kick the can further down the road.

What can be done? Ensuring lending standards are maintained to protect borrowers from over-extending themselves – including maintaining serviceability stringency and enforcing loan to-value ratio limits – can help minimise the chances of an asset price bubble. Also, fiscal policy settings around tax, such as capital gains and negative gearing – are also mechanisms that could be strengthened to dampen the attractiveness of housing investment (relative to other investments).

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