The Minutes of the October meeting confirm the profound changes to policy which were outlined by the Governor on October 15.
The Minutes of the October Board meeting of the Reserve Bank of Australia confirm the key themes of Governor Lowe’s speech which was delivered on October 15.
They indicate that the Board had effectively decided to ease policy at the October meeting.
One reason for delaying the announcement would have been to allow the government “clear air” to sell the Budget, which was announced later on that same day, October 6.
The Minutes even cleared up the possibility that the Board would have waited to assess the Budget. The Minutes point out that “The Secretary of the Australian Treasury briefed members on the main features of the Budget”.
But another reason would be to have given more time to the market to absorb the dimensions of the upcoming policy decision.
The concepts which the Governor outlined in his speech last week to a Banking Conference were profound “game changers” for policy and the strategy of allowing ample time for the market to digest these changes makes considerable sense. We provided a detailed analysis of that speech in a bulletin on October 16.
The Minutes describe the policy changes we can expect to be announced at the next Board meeting in the following way:
- “reducing the targets for the cash rate and the three year bond yield towards zero; without going negative, and buying government bonds further along the curve”.
The commitment to buying more bonds is clearly signalled:
- ”larger balance sheet expansions by other central banks relative to the Reserve Bank was contributing to lower sovereign yields in most other advanced economies than in Australia…. Members discussed the implications of this for the Australian dollar exchange rate”.
It is important to be clear on this theme. The Board is seeking to lower the AUD through the impact of its purchases of domestic bonds on liquidity and interest rates. It is not embarking on a currency manipulation path which would result from unsterilised purchases of foreign bonds.
- “as the economy opens up, members considered it reasonable to expect that further monetary easing would gain more traction than had been the case earlier”.
- “a further easing would reduce financial stability risks by strengthening the economy and private sector balance sheets”.
- “the Board agreed to place more weight on actual, not forecast, inflation in its decision making”.
- “the Board would like to see more than progress towards full employment before considering an increase in the cash rate”.
Conclusion
We can only reiterate our forecasts which were first released on September 23 (initially expected on October 6 but moved to November 3 on September 29).
The Board will cut the cash rate; the three year bond target and the rate on the Term Funding Facility from 0.25% to 0.10%.
In addition, it will reduce the rate on surplus Exchange Settlement Account balances from 0.1% to 0.01%.
We expect the Board will announce the intention to purchase bonds issued by bot Australian Government and semi government authorities in the 5 – 10 year maturity range.
However, we do not expect a specific quantity target for these purchases or an explicit yield target beyond the existing three year target.
