RBA Deputy Governor Guy Debelle outlined four possible options for monetary policy over the period ahead in a speech. The first option is for buying bonds further out along the curve. RBA has focused on three-year yield as target because, unlike the US, Australian financial instruments price predominantly off the short end of the curve. Nonetheless, ‘additional bond purchases would have some effect in lowering longer-term interest rates.”

The second option is foreign exchange intervention but it’s not clear if this would be effective as the Australian dollar “broadly aligned with its fundamentals.” Recent movements in AUD exchange rate partly reflects “the depreciation of the US Dollar”, the “high price of iron ore”, and “relatively better growth outcomes”. A lower exchange rate would “definitely be beneficial” for the economy and “we are continuing to watch developments” in the forex markets.

The third option is to lower current structure of rates without going negative. The fourth option is negative rates but the “empirical evidence on negative rates is mixed”.

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Full speech here.


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