RBA waiting in the wings, but looks set to cut interest rates again on Thursday

The Fed and other central banks firing their policy guns is forcing the RBA to take actions it had very much hoped to avoid.

Governor of the Reserve Bank of Australia Philip Lowe. Picture: Stephen Cooper

The Reserve Bank of Australia looks set to cut interest rates again on Thursday and fire off its first round of alternative monetary policy as it plays catch-up, catch up with faster-moving international peers.

The shock the coronavirus has dealt to the global economy and the ensuing financial markets chaos mean it no longer makes much sense for the RBA to hold on to what’s left of its conventional policy weaponry.

The RBA was the first major central bank to respond to the crisis, cutting its cash rate by 25 basis points to a record low 0.5 per cent on March 3.

But it is now looking like a laggard after the US Federal Reserve slashed its benchmark interest rate to near zero on Sunday and said it would buy $US700bn ($1.14 trillion) in Treasury and mortgage-backed securities in response to the pandemic.

The Fed’s rate-setting committee said it would hold rates at their new lows “until it is confident that the economy has weathered recent events and is on track” again.

On Monday, the Reserve Bank of New Zealand cut its benchmark rate by 75 basis points in its own emergency announcement, adding that large-scale asset purchases might also be needed.

At the time of its March 3 cut, the RBA had hoped that substantial government fiscal stimulus would soon follow, buying it time to sit on the sidelines for a while longer.

Sure enough, Treasurer Josh Frydenberg last week unleashed a fiscal sugar hit for the economy that will push $11bn into bank accounts and over shop counters between March 31 and June 30.

But global events have since been fast overtaking local ones as the pandemic overwhelms everyone and everything. The Fed and other central banks firing their policy guns is forcing the RBA to take actions it had very much hoped to avoid.

The Australian central bank now looks likely to set bond-market price targets on Thursday and back that up with a promise to buy government bonds in the secondary market as needed. There is even scope for policymakers to announce wider measures to support funding for banks.

Anything short of another interest rate cut and the start of alternative policy measures will leave many onlookers in financial markets deeply perplexed.

And the RBA has sprung to action already. Governor Philip Lowe on Monday moved to bring some order to the bond market, saying the bank stands ready to purchase government bonds “to support the smooth functioning of that market” and will conduct one-month and three-month repo operations until further notice to provide liquidity.

These measures were necessary to address the dysfunction in debt markets and possibly pave the way for alternative policies, as setting pricing targets for government bonds in a poorly functioning bond market might not work.

Prashant Newnaha, senior debt strategist at TD Securities said he had anticipated an RBA move to QE sometime after June but with the RBNZ now indicating that QE is on the cards, the Australian central bank is being pushed into action sooner than expected.

The RBA may also seek to ease pressures on bank funding, potentially setting up a term-funding scheme, he said.

Alan Oster, chief economist at National Australia Bank said additional policies cannot be ruled out, particularly if the bank detects any problems in the supply of credit in the financial system.

The Wall Street Journal