Australia c.bank puts emphasis on balance sheet expansion for stimulus

Credit: REUTERS/STEVEN SAPHORE

The Australian central bank's massive purchases of government debt and loans to lenders are working to provide much-needed stimulus to the economy, an official said on Tuesday, a further hint it could expand its buying binge to longer-dated debt.

By Swati Pandey and Wayne Cole

SYDNEY, Oct 20 (Reuters) - The Australian central bank's massive purchases of government debt and loans to lenders are working to provide much-needed stimulus to the economy, an official said on Tuesday, a further hint it could expand its buying binge to longer-dated debt.

With the cash rate near zero and no plans to take it negative, Reserve Bank of Australia (RBA) Assistant Governor Chris Kent put the emphasis on the rapidly expanding balance sheet as the main provider of fresh stimulus.

"Some of the tools influence interest rates directly in a way that gives us greater control over a wider range of rates than previously," Kent said in a speech in Sydney.

He pointed out that forward guidance and the RBA's three-year yield target of 0.25% have lowered short-term borrowing rates.

"Other elements of the package affect interest rates indirectly, and are harder to assess," he added. "But, the extent of stimulus from these sources can be gauged in the first instance by considering their effect on the RBA balance sheet, hence my use of the term ‘balance sheet’ tools."

The RBA expanded its balance sheet by A$97 billion ($69.2 billion) during the year-ended June to A$279 billion boosted by its package of policy measures in March to rescue the country's economy from a deep recession.

It had then announced an emergency 50-basis-point-cut to the cash rate to 0.25%, launched an "unlimited" bond buying programme to keep three-year yields low, initiated a cheap funding facility for commercial banks and flushed financial markets with liquidity.

Economists are widely expecting the RBA would cut its cash rate by 15 basis points to a historic low 0.1% at its monthly board meeting next month and expand its government bond buying programme to include longer-dated debt. AU/INT

Kent reiterated the RBA's forward guidance on Tuesday, saying the Board will not increase the cash rate until actual inflation is sustainably in its 2% to 3% target range.

(Reporting by Swati Pandey and Wayne Cole; Editing by Sam Holmes)

((swati.pandey@thomsonreuters.com; +61 2 9321 8166; Reuters Messaging: twitter.com/swatisays))

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