RBA adopts ‘whatever it takes’ approach to Quantitative Easing
The RBA was obliged to cut rates to 0.25 percent. It is right that monetary policy should be working in a co-ordinated manner with the government’s fiscal stimulus packages. The RBA has given strong forward guidance that the cash rate will not be going up any time soon. From previous RBA guidance it is clear that we have now reached the Effective Lower Bound for cash rates in Australia and any further cuts will be ineffective.
But the real news is that we are now firmly in the Quantitative Easing era – the RBA has adopted a ‘whatever it takes’ approach to its program of buying government bonds. There are no monetary caps or timing limits on the QE program announced today. The explicit target for its bond purchases is to get the yield on 3 year Government Bonds down to 0.25 percent.
We believe the RBA is justified in engaging in large scale bond purchases at this point in time. Insofar as they can increase liquidity in the system and reduce interest rates at the longer end of the curve it may help cushion the blow of the COVID-19 shock on the economy.
Ultimately however these measures are designed to provide confidence that our financial system remains robust and is able to weather this storm.
The Bank has been preparing the market for unconventional monetary policy for some time, and it should be noted that while very rare, it is not wholly new to the RBA.
Many of the elements of this policy approach involve a re-run of the measures the RBA took during the GFC to support the financial system. Large-scale purchase of government bonds in the secondary market is the new tool that the RBA will unleash.
As was done during the GFC the RBA will ramp up its market operations to meet the liquidity needs of the market by raising the frequency of operations to supply funds and expanding the maturity at which these funds are provided. As we saw in 2008/9 the central bank has scope to create new liquidity facilities, increase the range of collateral accepted and broaden the set of institutions that can participate in its market operations.
The RBA has announced a term funding facility designed to help the banking system support the provision of credit to small and medium-sized businesses. To be effective this will need to dovetail in with the stance that the regulatory bodies, APRA and ASIC, will take in the current economic environment.
More generally, it is important the RBA is working with other regulatory authorities to ensure that the financial system is able to function as efficiently as possible through this stressful period. This will maximise the ability of banks and other financial institutions to take advantage to the RBA policy measures and the ability of businesses and individuals to benefit from the government’s fiscal initiatives.
This includes establishing frameworks and guidelines to allow banks and other lenders to work with their customers to negotiate constructive outcomes. This will be facilitated by the regulators, APRA and ASIC, taking into consideration the economic environment, when considering the compliance of lenders with the laws and regulations that they administer.
KPMG believes the fiscal stimulus measures already announced by the government were appropriate at the time, but more needs to occur to ensure the stability of the real economy. Combined with the measures announced today by the RBA our financial system is now in a stronger position to underpin any further fiscal policy aimed at ensuring businesses and individuals are able to survive this serious period of disruption and come out the other side ready to participate in a normalising economy.
Federal government provides 15 billion to support small banks and non-bank lenders
The government has provided $15 billion to its debt agency, the Australian Office of Financial Management (AOFM), to invest in the wholesale funding markets used by small banks and non-bank lenders. This measure complements the RBA actions announced today, particularly the $90 billion Term Funding Facility designed to ease the funding costs of the larger banks and support the provision of credit to business. The AOFM investment in mortgage backed securities, asset backed securities and other assets will support liquidity in this segment of the funding market. This will encourage the small banks and non-bank lenders to support their customer base, largely made up of households and small businesses, by managing existing loans and continuing to lend.