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Sep 1, 2020, 9:41 AM GMT
#MonetaryPolicy

RBA Sets the Tone for a New Wave of Massive QE Expansion Programs

Earlier today, the Monetary Policy Committee (MPC) of the Reserve Bank of Australia expectedly decided to keep the Cash Rate unchanged at 0.25 per cent.

This move was largely inspired by the statement of FED Chair Jerome Powell at the Jackson Hole Symposium last week, who argued that central banks are likely to maintain the low-interest rates in the foreseeable future.

The Governing Board of the RBA also decided to markedly scale up its asset purchase facility almost four times, which is completely inlined with our own projections from earlier this week.

" Under the expanded Term Funding Facility, authorised deposit-taking institutions (ADIs) will have access to additional funding, equivalent to 2 per cent of their outstanding credit, at a fixed rate of 25 basis points for three years. ADIs will be able to draw on this extra funding up until the end of June 2021. […] To date, ADIs have drawn $52 billion under the Term Funding Facility and further drawings are expected over coming weeks. Today's change brings the total amount available under this facility to around $200 billion."

In the monetary policy report, it was further revealed that since the beginning of the coronavirus fallout in early-March, the RBA had purchased close to $61 billion of government securities.

The Board expressed readiness to continue buying back government treasuries in order to preserve the steady flow of liquidity within the Australian financial system. Additionally, the Bank strives to foster favourable conditions within the economy for maximum employment and inflation near the Bank's target rate.

The substantial scaling up of RBA's quantitative easing program was justified as a necessary factor in facilitating the transition of Australia's economy through what the Bank deems "uneven and bumpy" road to recovery.

In its baseline scenario, the RBA projects unemployment to rise to around 10 per cent by the end of the year, before sliding back to close to 7 per cent in 2021. Meanwhile, subdued inflationary pressures are anticipated to persist until next year, with headline inflation remaining below the desired 2 per cent target-level.

Despite the economic downturn from the coronavirus in the second quarter being smaller than initially feared, the RBA maintains that loose monetary policy is needed to elicit recovery even as uncertainty continues to prevail.

Meanwhile, the bullish run of the Australian dollar was unfazed by the publication of RBA's decision to scale up its QE program.

As can be seen on the 4H chart below, the AUDUSD pair recently broke out above the major resistance level at 0.73900, which has been prevailing since December 2018.

The underlying market momentum remains ostensibly bullish, as demonstrated by the MACD indicator.