RBA faces big decisions, not cash rate


Reserve Bank of Australia Governor Philip Lowe is due to address an audience in Queensland next week, his last public appearance scheduled ahead of a board meeting in July where key decisions are to be made .

But before borrowers get too anxious, the central bank isn’t about to raise the official spot interest rate – that decision is still several months away.

However, there are a few technical issues to be addressed, which the layman may find quite dry, but which make economists and financial market analysts salivate.

In a speech in October last year, RBA Deputy Governor Christopher Kent admitted that monetary policy had “just gotten more complex.”

And he wasn’t kidding.

In addition to the cash rate – the simple political lever that influences the rate on variable rate mortgages – there is now TFF, YCT, and QE.

In other words, the term funding facility, the three-year bond yield curve target, and quantitative easing – a bond buying program aimed at maintaining market interest rates and low borrowing costs.

The term finance facility, which provides banks, and in turn their customers, with cheap loans for three years, is due to end this month.

The RBA announced its intention to make a decision on its three-year bond target and quantitative easing program at the July 6 board meeting.

Dr Lowe has already attended a rare press conference after the meeting.

The RBA targets the three-year government bond in financial markets to ensure that its yield, or interest rate, stays at 0.1% and in line with the cash rate. Most fixed rate mortgages have three-year bonds.

He maintains the target by buying the benchmark three-year bond index – which matures in April 2024.

Is the question on analysts’ lips now to switch to the November 2024 bond as it becomes the three-year benchmark?

There is a growing sense among analysts that this will not be the case and will stick to the April 2024 version.

For now, the RBA’s indications are that it does not intend to raise the cash rate until inflation is sustained within the two to three percent target, an event that ‘she doesn’t expect it to happen until 2024 at the earliest.

Moving to November 2024 would suggest that the RBA does not expect to hike interest rates until 2025.

National Australia Bank economists believe the better-than-expected economic recovery means the RBA cannot credibly commit to rates unchanged for the next three years on an ongoing basis.

Regarding QE, or the five- and ten-year government bond buying program that began last November, the RBA will consider future purchases when its second tranche of $ 100 billion runs out in September.

The RBA joined the QE era later than the other major central banks, which rose to prominence during the 2008-09 global financial crisis and when the US Federal Reserve could no longer cut traditional rates.

Westpac chief economist Bill Evans believes Australia’s program is now mature enough that it can grow at a more flexible and unlimited rate of $ 5 billion per week, rather than committing to another fixed block over a period of time.

However, NAB economists expect it to cut the next tranche to $ 75 billion over six months.

But what about the cash rate?

ANZ economists believe the RBA’s conditions for a rate hike will be in place in the second half of 2023 rather than 2024, and when it hikes the spot rate twice to 0.5%.

At that point, they expect inflation to be persistently above 2%, with wage growth above 3% as the unemployment rate drops to 4.2% by the end of the year. 2023.

But even at 0.5 percent, the spot rate would still be unusually low.


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