RBA cuts, as I predicted.
So as I predicted a couple of weeks ago, the RBA cut rates yesterday.
Actually, the did more than that. They did four things:
- a reduction in the cash rate target to 0.1 per cent
- a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent
- a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent
- a reduction in the interest rate on Exchange Settlement balances to zero
- the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.
So how do we make sense of that spaghetti bowl.
We can think of it in two ways.
First, there’s the impact on borrowing costs. The reduction form 0.25 to 0.1 isn’t massive – it’s a shade under a normal rate cut – but in times like this, every basis point counts.
What’s probably more interesting is the reduction in the Term Funding Facility (TFF). This is lending that the RBA provides directly to the banks, which in turn feed through into the fixed rate loans they’re offering customers.
Again, the move from 0.25 to 0.1% isn’t massive, but still welcome.
What’s interesting though is whether this number could actually go any lower. There’s no theoretical reason it couldn’t. There’s no theoretical reason it couldn’t go negative, with the RBA effectively paying banks to take money off them to lend to customers.
Going forward, it’s this TFF rate that is going to be the one to watch. This is where any future reductions in your mortgage rates are going to come from.
I said we can think of it in two ways, and the other way to think about it is that the RBA wants to bring the dollar down.
At around 70 cents to the US dollar in recent times, that’s actually a pretty strong currency for an economy in crisis.
Bringing the dollar down helps our exporters and boosts the economy.
So by targeting the yield on government bonds, and bringing it down, they’re making those bonds less attractive to foreign investors.
If foreign investors don’t want Aussie dollars to buy those bonds, then the currency falls.
And so that’s what the RBA is doing here.
So that’s the key elements here I think.
The QE element – the purchase of $100bn of government bonds – is interesting.
I don’t think we’re talking about a massive amount of money yet, but this is potentially just the first salvo. It opens the way up for more.
But I’ll need to unpick what it actually means. I’ll do some digging and get back to you.
Watch this space.