John Edwards urges RBA to buy bonds

Former Reserve Bank board member John Edwards has urged the central bank to ramp up government bond buying.

Former Reserve Bank board member John Edwards: ‘The most effective way for the RBA to assist the economy at this point is to buy more Australian government bonds at the long end, for example 10 years.’

Former Reserve Bank board member John Edwards has urged the central bank to ramp up government bond buying, saying it’s the best option for supporting the economy as it shrugs off the worst of the COVID-19 recession and turns for growth.

“The most effective way for the RBA to assist the economy at this point is to buy more Australian government bonds at the long end, for example 10 years,” Dr Edwards said.

The comments by Dr Edwards, who served on the RBA board as the economy emerged from the global financial crisis, come as the central bank hints strongly at the announcement of a bigger bond buying program at its November 3 policy meeting.

The RBA, which is already buying bonds at the three-year part of the yield curve, is expected to target lower yields on five-year and 10-year maturities by announcing a set amount of purchases to be made over time.

To cement the impact of the quantitative easing program, RBA governor Philip Lowe is likely to add that the central bank has unlimited scope to increase bond buying if needed.

Dr Edwards said the main benefit of aggressively moving to lower yields on longer-dated government bonds was that it put added downward pressure on the dollar, which supported exporters and the economic recovery more broadly.

“This will restrain the appreciation of the Australian dollar,” Dr Edwards said.

Even mentioning the possibility of QE has already been enough to lower bond yields and the dollar.

In the last week, the yield on 10-year Australian government bonds has fallen from 0.838 per cent to a low of 0.722 per cent on Friday. It stood at 0.774 per cent yesterday. The gap between Australian 10-year bond yields and US Treasuries has narrowed from 11.3 basis points last week to minus 1.2 basis points.

Meanwhile, the dollar has fallen by about US1c in the past week as speculation around further monetary easing in November has grown.

Ray Attrill, the global head of currency strategy at NAB, said the retreat in the currency was mostly due to talk of the QE program from the RBA.

A QE program would also help fund the government’s huge expansion of debt, which is expected to approach $1 trillion over coming years.

“Buying bonds will help finance continuing deficits and lower the cost of expansionary fiscal policy, another benefit of this approach,” Dr Edwards said.

The RBA is also expected to announce a cut to its official cash rate from 0.25 per cent to 0.10 per cent, something that will have much less impact given interest rates at the very short-end of the yield curve have already compressed to around 0.10 per cent.

“Cutting an already rock-bottom official cash rate will have no effect whatsoever,” Dr Edwards said.

Dow Jones Newswires