Australias Central Bank Is Reviewing Three Key Issues on Policy Easing

Australias central bank chief Philip Lowe said his board is assessing whether buying longer dated bonds would help spur hiring, sending the currency and 10-year yields lower.

In response to a question after an address in Sydney, the governor noted that Australia‘s 10-year yields are higher than “almost everywhere in the world.” The bank is trying to understand whether that’s because, after buying longer-dated securities in March, it had since stopped, he said.

“If we buy government bonds in the 5-10 year range, is that going to create more jobs？ How would it create more jobs？” he said. “We‘re taking our time to work through that issue, it’s a very important issue but also quite complex. But that‘s what we’re discussing at every one of our meetings.”

The Australian dollar fell as much as 0.5% on the governors comments, and was trading at 71.43 U.S. cents at 11:11 a.m. in Sydney, and the 10-year yield fell 7 basis points to 0.77%.

Philip Lowe

Photographer: Brent Lewin/Bloomberg

In the speech, Lowe had said hes working through how much potential traction any further easing will gain, the potential effect on financial stability of such a move, and what international counterparts are doing before taking any new policy steps.

“We have been considering what more we can do to support jobs, incomes and businesses in Australia to help build that important road to the recovery,” Lowe said in the speech to a Citigroup Inc. conference in Sydney. “The board has not yet made any decisions.”

The Reserve Bank of Australia has taken on a support role during the pandemic crisis due to limited conventional ammunition, undertaking a bond-buying program to lower borrowing costs and allow the government to deploy a vast fiscal stimulus program. The RBA in March, at the height of Covid uncertainty, cut its cash rate to 0.25% and set the same target for the three-year yield as a sign to firms and households that rates will stay low.

Australias early lifting of restrictions and reopening of the economy was dented by a renewed outbreak in the southeastern state of Victoria. The economy has since tipped into recession and Treasury estimates unemployment will peak at 8% this quarter.

“In terms of unemployment, we want to see more than just ‘progress toward full employment,’” Lowe said in his speech. “We want to see a return to labor market conditions that are consistent with inflation being sustainably within the 2% to 3% target range”

In an address last month, RBA No. 2 Guy Debelle laid out the following potential policy options:

• Buying bonds further out along the curve, supplementing the three-year yield target

• Currency intervention, though he noted that “with the Australian dollar broadly aligned with its fundamentals, it is not clear this would be effective in the current circumstances”

• Lowering the current structure of rates in the economy a little more, without going negative; and

• Going negative. Debelle said the evidence is “mixed” on this policy and restated some of the advantages and pitfalls

Lowe, responding to another question, noted that cutting rates to 0.10% or buying longer-dated bonds “realistically” wasnt going to help drive inflation back to its 2-3% target.

{27}

“So a longer-term question we‘re also considering is how does the inflation targeting framework sit in this world that we’re currently in,” he said. “Weve had some difficulty over recent years of averaging inflation at 2% and the pandemic is going to make that much more difficult. So what role does that have and that role has to evolve over time.”

{27}{28}

(Updates with governor discussing need for inflation target to evolve in penultimate, final paragraphs)

{28}