Tim Hext: RBA brings out the Howitzer
RESERVE Bank Governor Phil Lowe may be cautious by nature but he can recognise when decisive action is required.
The RBA has today delivered a rate cut to 0.25%.
Exchange Settlement balances interest (what the RBA pays for cash parked with them) should have been 0% (25 below) but is now set at 0.1%.
More importantly, in the Quantitative Easing (QE) arena the RBA is targeting 25bp for Government 3-year bonds.
Technically the money will come back to the RBA so it’s not Modern Monetary Theory. And it’s price, not quantity-targeted — so not Quantitative. But effectively it’s QE.
The RBA will be in the market buying government securities as long as the 3-year rate is above 25bp.
They will focus on Commonwealth Government Loans around three years while also leaving the option open for longer.
They’ll also be buying semi-government bonds.
The market was at 50bp going in and is still marked at 35bp.
It is priced-based but they are not open to any volume any day. They will keep going at their own pace as long as the 3-year rate is higher than 25bp.
There should be a big one to start tomorrow.
The RBA also announced a Term Funding Facility – 3-year funding to Authorised Deposit Taking Institutions (ADIs).
This is a good step although it does not solve the problem of banks extending credit to businesses. (That solution is likely to be fiscal).
My thoughts
This is massive Quantitative Easing.
It will solve Government Bond liquidity and to a lesser extent semi-government liquidity. 3-years will be anchored around 0.25bp. Long-end should still be captive to global moves but panic should subside.
Some will complain it’s not enough to solve credit markets and other dislocations, but keep in mind this is step one.
There is likely more to follow.
Basically they are flooding liquidity into the system and this will be a big help.
I suspect markets will be slow to appreciate how big this is, but I believe in months to come it will be seen as the first step to stabilisation.
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