HomeRBA Sends an Unusual Warning

RBA Sends an Unusual Warning

5 November 2020 By Mircea Vasiu

The month of November started as usual – with the Reserve Bank of Australia (RBA) releasing its monetary policy statement and interest rate decision. It does so monthly, every first Tuesday in the new month. 

Rarely does the RBA take the market by surprise. It chose to do so this November, perhaps because investors’ attention and focus lied with the U.S. elections.

The RBA delivered a powerful, dovish message. It lowered the cash rate when the market thought it had already reached the lower boundary. Moreover, it strengthened the forward guidance for the period ahead, warning about a gradual and slow economic recovery.

Australia coronavirus cases declined recently, to the extent that last weekend there was no local transmission reported. As such, the RBA’s dovishness comes as a surprise and makes investors wonder what other central banks will do in parts of the world where the coronavirus transmission in the second wave exceeds the first wave’s rate of infection?

RBA Measures and Its Message At the November Meeting

Despite admitting that the recent economic data is better than expected and much better than three months ago, the RBA felt the need to ease some more. It did so by not only lowering the cash rate, but by delivering an entire stimulus package design to further help the Australian economy.

Besides lowering the cash rate to 0.1%, the RBA announced that it targets a lower yield on the 3y AGB (Australian Government Bond). Effectively, it means more bond-buying planned ahead as by doing so, the price of the bonds rises while the yield declines. In plain English, more QE from the RBA.

It also expanded the QE to government bonds with maturities between five and ten years. More precisely, the RBA committed to purchasing AUD100 billion worth of these bonds over the next six months in a further attempt to lower the yields on longer-term dated bonds. This is basically the new QE announced, and any 3y AGB bought would add to the size of the program.

To sum up, the RBA statement is as dovish as dovish can be. Because it came ahead of the Bank of England, the Federal Reserve, and the ECB, it raises the question if there is coordinated easing that comes for the year-end?

It is at least strange that the RBA delivered such a package without other central banks to follow. Moreover, the Australian Dollar (AUD) strengthened as a result, instead of reflecting the dovish sentiment.

Therefore, it would be wiser for market participants to price in more easing from developed countries’ central banks in 2020. After all, the pandemic did not go anywhere – only investors’ attention shifted to the U.S. elections.