RBA strategy not odd so much as odds-on

It might have seemed odd that the Reserve Bank announced on Tuesday it would double its money creation program to $200bn to support the economy.

After better news about jobs, business and household confidence, and house prices, it might have seemed odd that the Reserve Bank announced on Tuesday it would double its money creation program to $200bn to support the economy.

Back from its summer break, the RBA board conceded the economy was doing much better than it had expected, but flagged it would buy another $100bn of state and federal government bonds ­between April and September.

It was always going to buy more government bonds, regardless of the state of the economy.

For a start, state and federal governments are borrowing massive sums to plug yawning gaps ­between their expenses and revenue, so there’s no shortage of bonds to buy.

“This pace of purchases will mean the RBA will be withdrawing around $1.5bn of government bonds from the market each week,” one NAB economist ­pointed out.

Other countries are financing their governments by creating money like there’s no tomorrow so we have to as well, unless we want the Australian dollar to soar.

If it’s madness, then at least it’s madness of the collective variety. With the currency in the high US70c range for some time, the RBA already worries it is overvalued, dampening our exports.

The economy might be ­improving relative to dire expectations, but in absolute terms inflation is still far too low for the RBA’s liking — 0.9 per cent last year when the RBA aims for 2-3 per cent — and unemployment, while dropping to 6.6 per cent in December, remains well above the 4.5 per cent the RBA has specified as “full employment”.

Expect even more QE later this year. UBS estimated RBA holdings of debt will be equivalent to about 27 per cent of GDP by the end of 2021, a long way short of holdings in excess of 120 per cent in Japan and Europe.

As a share of government debt outstanding, the Reserve Bank owns a much smaller portion, about 15 per cent, than other central banks.

Monetary policy is a lot more complicated these days. The official cash rate would remain at 0.1 per cent until at least 2024, the RBA governor said, leaving the traditional cash rate on the sidelines until then.

Yet there is a new set of tools: TFF, YCC and QE. Only the QE dial was turned this month, but expect tweaks to the others in coming months too. The Term Funding Facility (an ultra-cheap $185bn line of credit to banks), could be extended. Yield Curve Control (a promise governments won’t have to pay more than 0.1 per cent interest to borrow for three years) could be dumped or extended to other maturities.