Reserve Bank paves way for November rate cut

RBA signals it sees a need to further support the economy, including by cutting cash rate and expanding bond buying.

A pedestrian walks past the Reserve Bank of Australia (RBA) building in Sydney, Tuesday, March 3, 2020. The Reserve Bank is expected to cut the cash rate to a new record low 0.5 per cent on Tuesday. (AAP Image/Joel Carrett) NO ARCHIVING

The Reserve Bank of Australia has signalled that it sees a need to further support the economy through various channels, including expanded government bond buying and lowering its official cash rate closer to zero.

According to the minutes of its October 6 policy meeting, the RBA’s board “agreed to maintain highly accommodative policy settings as long as required and to continue to consider how additional monetary easing could support jobs as the economy opens up further.”

Consistent with comments made last week by RBA Governor Philip Lowe, the board said cutting the interest rate as the economy begins to recover would mean greater policy traction was likely.

“The board discussed...the options of reducing the targets for the cash rate and the 3-year yield towards zero, without going negative, and buying government bonds further along the yield curve. These options would have the effect of further easing financial conditions in Australia,” the minutes said.

The commentary in the minutes will further strengthen bets that the RBA will announce a multifaceted easing in monetary policy at its November 3 policy meeting that includes cutting its official cash rate from 0.25 per cent to 0.10 per cent while lowering its three-year government bond yield target to the same level and announcing a significant bond-buying program targeting five and 10-year government maturities

In the absence of a program of long-dated government bond buying at the RBA, Dr Lowe said last week that he had grown concerned that Australian bond yields were higher than they should be, something that could put upward pressure on the Australian dollar and slow the economic recovery.

“Members noted that the larger balance sheet expansions by other central banks relative to the Reserve Bank was contributing to lower sovereign yields in most other advanced economies than in Australia,” the minutes said. “Members discussed the implications of this for the Australian dollar exchange rate.”

Easier monetary conditions would strengthen the economy, thus easing financial stability risks, according to the minutes. “On balance, the board thought it likely that there were greater financial stability benefits from a stronger economy, while acknowledging that risks in asset markets had to be closely monitored.”

Dow Jones Newswires