RBA at the monetary policy crossroads

The RBA will and should cut rates to 0.25 percent.

It should be noted that previous guidance from the bank is that this is the Effective Lower Bound for cash rates in Australia and further cuts will be ineffective.

The RBA has been preparing the market for unconventional monetary policy for some time. KPMG expects the RBA to announce a program of purchasing government bonds that dovetails in with the Federal Government’s program of fiscal measures designed to assist the economy through the COVID-19 health crisis.

The RBA has provided guidance that its program of unconventional monetary policy will be focused exclusively on government bonds. KPMG believes that this is a prudent approach but given the fast-changing impacts of the COVID-19 virus on the economy, particularly in relation to progressively closing down parts of the economy, this focus on government bonds may change.

KPMG believes there is little downside to the RBA 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.

We anticipate the fiscal stimulus measures the government has already implemented and those that will come in the coming weeks and months will provide the RBA with the depth required in the bond market to make an impact through this mechanism.

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