The Reserve Bank of Australia will review its Quantitative Easing program early next year, and is open to the possibility of increasing the pace of weekly purchases well before the end of the six-month period, if needed.
On November 3, the RBA announced a QE program comprising of purchases of A$5 billion of government bonds and Semis each week, totalling A$100 billion.
In a speech on that day, Governor Philip Lowe said it was possible for the RBA to increase the size of its purchases.
“Monetary policy is now about more than just short-term interest rates – we have returned to a world in which quantities matter too.”
“In this world, it is certainly possible for us to increase the size of our bond purchases,” he said.
“Given this, we will continue to closely monitor the economic situation and the impact of our purchases on market functioning. If we need to do more, we can and we will.”
While it appeared that Lowe was referring to the possibility to doing more bond purchases once the program ends, it is now clear that he was also referring to doing more before the end of the current six-month program.
The RBA will be reviewing the program early next year and make an assessment on whether more needs to be done. If there is a need to do more, the RBA would increase the pace of purchases and the size of the program.
The RBA could also cut the pace of buying but that is a less likely scenario, one that would require not just strong economic data locally but also ample good news on the global front, especially on the pandemic.
OPEN TO BUYING PRIVATE-SECTOR ASSETS
Apart from increasing the pace of bond-buying the RBA is also open to the possibility of buying private-sector assets, especially if it observes dysfunction in those markets.
This represents a major shift from what Governor Lowe said in the past.
In a speech late last year, Lowe said: “We have no appetite to undertake outright purchases of private sector assets as part of a QE program.”
Lowe cited two reasons for this at the time:
-- that there was no sign of dysfunction in our capital markets that would warrant the Reserve Bank stepping in; and
-- that the purchase of private assets by the central bank, financed through money creation, represents a significant intervention by a public sector entity into private markets.
It also comes with a whole range of complicated governance issues and would insert the Reserve Bank very directly into decisions about resource allocation in the economy.
At the same time, Lowe said there were some scenarios where the RBA might consider such intervention. It is possible some of those scenarios could play out, opening the door to buying private-sector assets.
Currently, the only form of buying of private sector assets is via the Australian Office of Financial Management which is administering the government’s A$15 billion Structured Finance Support Fund.
The Fund makes targeted investments in structured finance markets used by smaller lenders that provide consumer and business finance, investing in rated