Authored by Kieran Davies; Coolabah Capital Investments.
For a number of months now Coolabah Capital Investments (CCI) has forecast that the RBA would embark on another round of policy easing, which is a view that markets have gradually come to embrace. This note summarises our current expectations regarding the precise policy mix the RBA will consider adopting in November. Our central case is that this includes:
- Cutting the cash rate/3-year bond yield target/Term Funding Facility rate from 0.25% to 0.10% (market: 0.1% for all rates).
- Cutting the deposit rate on exchange settlement balances from 0.10% to 0.01%, although it may opt for 0.05% given earlier concern about a zero deposit rate (market: 0.01%; range: 0.00-0.05%).
- Potentially adopting a 5-year bond yield target of 0.1% (market: no target; range: target to no target). The board has not discussed this option, but staff may be considering an additional target. A target would suggest the RBA expects a longer period of a near-zero cash rate, although the RBA would likely promote it as a tool to lower long-term bond yields.
- Introducing outright QE involving, on CCI’s estimates, approximately $140bn (range of $115-180bn) of purchases of Commonwealth and semi-government nominal bonds, initially over a year and tied to economic objectives (market: $100bn over 1 year; range: $75-180bn/7-18 months). This estimate is based on the required increase in the RBA’s balance sheet to achieve full employment, allowing for the increase in RBA assets due to purchases related to the existing 3-year target and a further drawdown on the Term Funding Facility. It is also similar to international experience.
CCI’s estimate of QE is at the high end of market expectations reflecting the challenge in reducing unemployment towards its full-employment level. The actual amount of purchases will depend on the how the economy evolves, but strategically the RBA may opt for a larger amount to have a greater effect on market expectations and to avoid revising the estimate in the short term (e.g., the RBNZ has revised the ceiling for its current LSAP programme up over time). These purchases might also be spread across a potential 5-year yield target and longer-term 5-year to 10-year purchases of Commonwealth government and semi-government bonds.
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