News | 03 May 2022

Anchors away – RBA change course and raise rates

Sean Langcake

Sean Langcake

Head of Macroeconomic Forecasting

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In concert with raising rates, the RBA has announced it will shrink its balance sheet, effectively tightening monetary conditions over the next few years. The RBA’s balance sheet expanded considerably through the pandemic due to the Term Funding Facility, QE and yield curve control programs. Although new asset purchases ceased some time ago, there was still a choice to either maintain the size of the balance sheet or allow it to shrink as assets mature; by choosing the latter, the RBA has opted for tighter policy.

Moving the cash rate target to 0.35% is a slightly curious move that defies the RBA’s conventional target structure and previous guidance. The rate paid on bank balances has been lifted from 0% to 0.25%; the cash rate has traded closer to this floor rate than its target through the pandemic due to excess liquidity in the financial system. We expect the cash rate will trade at a slight premium to the floor rate for now, but it will converge back toward target over time alongside the attenuation of the RBA’s balance sheet.

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