“The program was introduced to complement the price-based, three-year yield target introduced in March 2020 and the Term Funding Facility, along with the long-standing overnight interest rate target, which is the anchor point for the risk-free rate. term structure”, according to the minutes.
“Together, the policy measures would have lowered the entire interest rate structure in Australia and bolstered confidence in the economy.”
The central bank board “thought it was appropriate to allow the use of a [bond purchase program] again only in extreme circumstances, when the usual tool of monetary policy – the target of the spot rate – has been used as much as possible”.
Ready for loss
“When considering future use of a [bond purchase program]Members noted that it should be weighed against other policy options at the time, taking into account the costs of the [bond purchase program] under a whole range of scenarios.”
The central bank admitted it was about to record an accounting loss in its 2021/22 annual report due to falling bond prices.
As an indication of the central bank’s bond losses, the price of the Australian government bond fund of BetaShares has fallen 17.9 percent over the past year.
Despite it being “difficult to identify the exact effect” of bond purchases on the economy, the minutes said the program “contributed to the Australian economy’s strong recovery, with unemployment falling to its lowest level in nearly 50 years.” year”.
“In addition, a key benefit of the policy package was that it insured against the significant downside risks faced by the economy during the pandemic – a benefit that is inherently very difficult to quantify, especially given that downside risks were avoided.”
A separate review of the RBA’s controversial 2024 outlook is underway and will be published later in the year.
Rate increase size discussed
The minutes also show that at its most recent meeting, the RBA board debated whether it should raise the cash interest rate by 0.25 percentage point or 0.5 percentage point — a discussion that did not take place in August.
The board decided to raise interest rates by half a percentage point, given “the importance of bringing inflation back to target, the potential damage to the economy from persistently high inflation, and the still relatively low level of spot interest rates.”
David Plank, the ANZ’s chief of Australian economics, said the debate showed the administration was preparing to reduce the size and pace of rate hikes, but not before the central bank hiked another 50 basis points next month.
“From a tactical point of view, scaling back to a 25 basis point move soon risks being forced to scale back up in November if the [September quarter] CPI, published at the end of October, exceeds expectations. We think this kind of ‘backflip’ would damage the credibility of the RBA,” said Mr Plank.
The RBA has raised rates by 2.25 percentage points since May and markets expect the spot rate to reach 3.3 percent by the end of the year, before peaking at 3.9 percent in May next year.
JPMorgan economist Tom Kennedy said the minutes were broadly consistent with recent RBA communications.
“The macro discussion remains optimistic, highlighting the strength of consumption data and the resilience of household spending in the face of interest rate hikes already implemented,” Kennedy said.
“The tone is equally optimistic regarding labor data, which was strong in 2022 and, based on the bank’s liaison program, [and] leading labor indicators (e.g. job openings) are likely to remain robust in [the second half of the year].”