The handbrake on the jobs recovery saw Philip Lowe prepare financial markets for major easing, amid fresh calls from business and the Morrison government for Victoria’s lockdown to be ditched by Sunday.

“People are not at work in the numbers that they should be. People are subject to these very strict restrictions so my message to Daniel Andrews today is give Victorians back their freedom this Sunday,” he said.
The handbrake on the jobs recovery saw RBA governor Philip Lowe prepare financial markets for major easing, including long-dated bond buying and a possible cut to the official interest rate to 0.10 per cent from 0.25 per cent.
“It is reasonable to expect that further monetary easing would get more traction than was the case earlier,” Dr Lowe said.
“Is there benefit of us buying more longer-term bonds and what benefit would that have? If we buy bonds in the five to 10-year range, will that create more jobs? That’s what we are discussing at our meetings,” Dr Lowe told the Citi investment conference in Sydney on Thursday.
Bond buying
Australia’s 10-year bond yields are higher than any Western economy, Dr Lowe said, and the RBA was considering whether its absence from long-term bond buying was the reason for the higher rates.
The comments triggered a sharp fall in the Australian 10-year bond rate from 0.845 per cent to 0.77 per cent, while the Australian dollar fell 0.4 per cent to US71.4¢. The level of the three-year bond suggested a rate cut is now more than 60 per cent priced in.
In a move from its standard practice, the central bank also said it would now focus more on immediate economic indicators instead of targeted forecasts when deciding on monetary policy.
“We will now be putting a greater weight on actual, not forecast, inflation in our decision-making,” Dr Lowe said. “We want to see more than just progress towards full employment.”
The big four bank economists now all expect the cash rate to be cut to 0.10 per cent at the RBA’s next meeting in November on Melbourne Cup day.
The extent to which a cut to the cash rate aids the banks’ profits is ambiguous. A reduction on the Term Funding Facility, of which the banks have tapped more than $80 billion, from 0.25 per cent to 0.1 per cent will provide a boost to offset a potential reduction in the rate the banks receive on funds at deposit with the RBA.
A further reduction in the cash rate may, however, spur more loan demand from customers.
Some economists said the RBA would leave the cash rate on hold in November but announce a significant bond-buying program.
“We expect the bank will maintain the current cash rate at 25 basis points and yield curve control target of 25 basis point,” JPMorgan’s Tom Kennedy said.
“Its also interesting the governors speech de-emphasised short-end rates, with the focus clearly on quantitative easing and how lower longer-dated bond yields would affect the economic recovery.”
Citi’s Josh Williamson said the RBA’s further easing bias would come via longer-term bond buying rather than a cut in the cash rate.
“We maintain our call that the bank is unlikely to cut the cash rate again in 2020,” Mr Williamson said.
“While the governor remains open to more stimulus, we have previously mentioned that the efficacy of additional rate cuts is not straightforward, a point reinforced by the governor today.”
Effects on financial stability
Dr Lowe said that while the central bank board had not yet made any decisions, it was considering the effects of further monetary easing on financial stability and longer-term macroeconomic stability.
“It remains an important issue today, but the considerations have changed somewhat,” he said. “It is reasonable to expect that further monetary easing would get more traction than was the case earlier.
“To the extent that an easing of monetary policy helps people get jobs, it will help private sector balance sheets and lessen the number of problem loans. In so doing, it can reduce financial stability risks.”
This needs to be weighed against “any additional risks as people take more investment risk in the search for yield”.
“We also need to take into account the effect of low interest rates on people who rely on interest income.”
KPMG’s chief economist, Brendan Rynne, said more rate cuts would create a further gap between those with assets and those without.
“This is likely to provide a positive wealth effect for owners of assets such as stocks, houses and bonds,” he said.
“Over time policymakers may need to consider the distributional consequences of these types of policies, which are essential right now but may widen the gap between ‘haves’ and have-nots in our society as asset price increases puts them further out of reach.”
Ben Alexander, the co-chief investment officer of fixed income fund Ardea, said further RBA easing would have little effect on job creation.
“I find it really hard to imagine. I struggle to see how that would help,” he said.
The Business Council of Australia urged the Victorian government to bring forward a plan and timetable to open up.
“The data shows 120,000 Victorians have either lost a job or been stood down with no work since early July, BCA chief executive Jennifer Westacott said.
Extreme lockdowns and border closures are papering over the urgent need for a workable plan … We need a faster and more certain timetable so everyone can plan. Its simply not viable for many people and businesses in Victoria to remain mothballed indefinitely and cut off from the rest of the country.”
Council of Small Business Organisations of Australia’s Peter Strong said computer modelling ignored the dire human and economic impacts of prolonged restrictions.
Delaying instead of accelerating plans to relax restrictions would further undermine public confidence,” he said.