As widely anticipated, RBA left the cash rate and the 3-year bond yield target unchanged at record of 0.25% at today’s meeting. Yet, the decision to expand the size of Term Funding Facility (TFF) and the tone in the accompanying statement have suggested a mildly dovish shift to the monetary policy.
Inter-meeting economic indicators suggested that “the downturn is not as severe as earlier expected and a recovery is now under way in most of Australia”. They added, however, that the recovery is “likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy”. On the job market, the central bank acknowledged that “employment increased in June and July, although unemployment and underemployment remain high”. Yet, it remained concerned about the lockdowns in Victoria. The members suggested that “the virus outbreak in Victoria and subdued growth in aggregate demand more broadly mean that it is likely to be some months before a meaningful recovery in the labour market is under way”.
The major news of this month’s meeting is extension of the Term Funding Facility to June 30, 2021, from September 30, 2020. The size of the facility is also increased. RBA indicated that the TFF will continue to provide 3-year fixed rate funding to authorized deposit-taking institutions (ADIs) at 0.25%. Besides, ADIs will also be able to draw on a new supplementary funding allowance from October 1, 2020 through to 30 June 2021, for up to 2% of an ADI’s overall credit. The total amount of funding provided by the TFF is around AUD 200B.
In August, RBA pledged to increase bond buying in light of higher 3-year bond yield. In this month’s meeting, it reiterated that “the yield target will remain in place until progress is being made towards the goals for full employment and inflation”. It noted that it had bought a further AUD 10B of government securities over the past month to maintain the yield curve target and affirmed that “further purchases will be undertaken as necessary“.
On the policy statement, the central bank affirmed that it “will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3% target band” . It added that “the Board will maintain highly accommodative settings as long as is required” and “continues to consider how further monetary measures could support the recovery”. We interpret the latter reference as a dovish message, opening the door to further easing. In recent speeches, Governor Philip Lowe has suggested that the central bank has room to cut interest rate by -10 bps and increase buying of longer-term bonds. Policymakers also addressed the strength in Australian dollar. They attributed it the USD’s depreciation “against most currencies over recent months” and “higher commodity prices”. Yet, they did not sound very much concerned about Aussie’s recent appreciation.