Markets will adapt quickly to the expanded world of alternative monetary policy, but traders, investors and economists alike will return quickly with bowl in hand outstretched, asking the RBA to do more.
There are a few reasons to expect the demand to be made next year.
Firstly, the impact of some of what the RBA is likely to do in November will be of marginal impact. Cutting the official cash rate from 0.25% to 0.10% risks looking like a token gesture.
The RBA will also lower its three-year government bond yield target and the rate at which it lends through its term funding facility at the same time. In terms of further supporting the economic recovery, it will all be a little ho-hum.
Matters will get a bit more interesting if the RBA deploys QE, which will aim to rein in high government bond yields around the five-year and 10-year maturity mark.
When Australian bond yields rise above their U.S. counterparts, investment funds around the world take note.
The lure of high yielding AAA-rated sovereign debt is strong in a world where interest rates are close to zero or even negative. That’s a good thing given the Australian government needs to fund a ballooning budget deficit.
But it all needs to be tempered so that the Australian dollar does not jump in value. The road back from the recession will be long and arduous enough without the headwinds of a surging Australian dollar.
It still might prove to be all too little.
As 2021 gets underway, the withdrawal of government support for the unemployed and businesses will accelerate, potentially resulting in some of the toughest months of the pandemic.
The economy may start to feel hollowed out as businesses in the hardest hit industries such as tourism and hospitality hang out closed signs.
Economic policy makers will refer to it as the deep scarring of the economy, the kind of wound that may never be fully healed.
So the bowl will be out for more RBA policy action, turning the discussion more fully to negative interest rates.
It is still something the RBA is not of a mind to embrace given the risk that it could have widespread unintended consequences for how households spend and save and bank profits, while weakening overall investor confidence in the country.
RBA Governor Philip Lowe will deal with the ragged orphan asking for more by reminding financial markets that the central bank has in fact unlimited ability to buy bonds. It could buy multiples more than what it originally announces. Mr. Lowe has a big stick held behind his back and will use it.
Economist at JP Morgan, Ben Jarman, said he expects the RBA to announce a QE program worth $75 billion to $100 billion Australian dollars ($53.1 billion to $70.8 billion) over one year in November, implying average weekly purchases of A$1.4 billion to A$2.0 billion per week. If realized, the RBA’s QE purchases would peak at just under 9.0% of GDP by end-2021.
On top of this, the RBA will also have options such as currency market intervention to lower the Australian dollar, and even direct financing of the government if required.
So Oliver will get more if it’s needed from the RBA, but perhaps not what was expected to fill his bowl.
Write to James Glynn at james.glynn@wsj.com
The Wall Street Journal
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When Oliver Twist stood before Mr. Bumble asking for “more,” uproar ensued as the poor orphan was chased from the workhouse and sold on the street. Financial markets will need to be mindful of a such a scene after the Reserve Bank announces full-blown quantitative easing at its Nov. 1 policy meeting.