RBA Speech: “Monetary Policy During COVID”

Read the key points from the 6 May speech by RBA Deputy Governor Guy Debelle on “Monetary Policy During COVID”.

• The banking system has a very large amount of deposits at the RBA. There is now a large amount of liquidity in the system. Some banks still need to borrow overnight in the market to ensure their balance with the RBA remains positive, but these amounts are very small. And there are a lot of banks with large exchange settlement balances who are willing to lend to those banks.

• Exchange settlement balances are going to remain at a high level for quite a number of years, until the funds provided to the banking system under the Term Funding Facility (TFF) are repaid, and until the government bonds the RBA has bought mature. While exchange settlement balances are at a high level, the exchange settlement balance rate is going to continue to be the main anchor of the cash rate.

• The reduction in the cash rate target, the remuneration on exchange settlement balances and the actual cash rate has seen all short-term interest rates in the Australian financial system decline to historically low levels, including the important interest rate benchmark the Bank Bill Swap Rate (BBSW). The BBSW rate has fallen even further because of the availability of low-cost funding to the banking system. The lower BBSW rate translates directly to lower borrowing costs for the interest rates that reference it, particularly business borrowing rates.

• At the May RBA meeting, the RBA reiterated that in its central scenario, unemployment and inflation conditions are unlikely to be met until 2024 at the earliest. This complements the 3-year government bond yield target and has helped underpin the low level of interest rates across the economy. The RBA highlighted that it is the state of the economy that is the key determinant of policy settings, not the calendar – making the point for potentially an early rise in rates if their targets for inflation and unemployment are met before 2024 (even though they don’t expect this will happen).

• The date for final drawings under the TFF is 30 June 2021. Given that financial markets in Australia are operating well, the RBA announced earlier this week that is not considering a further extension of the TFF. The TFF will continue to provide stimulus while the funds borrowed by the banking system are outstanding. It will continue to provide low-cost funding to the banking system and keep downward pressure on borrowing rates for businesses and households throughout the next 3 years until the funds are repaid.

• The RBA recognises that rising housing prices heighten concerns in parts of the community. Housing price rises can have distributional consequences. They noted that it is an issue that is being considered, and that there are a number of tools that can be used to address the issue. But the RBA do not think that monetary policy is one of the tools. Monetary policy is focussed on supporting the economic recovery and achieving its goals in terms of employment and inflation. They noted that it is important to remember that while housing prices may not rise as fast without the monetary stimulus, unemployment would definitely be materially higher without the monetary stimulus.

• Read the speech in full

COVID-19Guy DebelleMonitory PolicyRBA