Extraordinary Is the New Vanilla for Australia’s Policy Makers

(Bloomberg Opinion) -- The Reserve Bank of Australia is making a down payment on a worsening global economy and prolonged domestic hardship.

The central bank offered to buy A$500 million ($359 million) of debt Wednesday, part of its policy to keep the yield on the three-year government bond at 0.25%. The RBA, which set the target in March as part of an emergency response to the pandemic, had been absent from the market since May. The yield had drifted a touch above the goal the past few weeks without drawing a response from Governor Philip Lowe. Why move now? The answer reflects growing unease about the frailty of the international recovery. Add the renewed lockdown of Australia's second biggest city, announced Sunday, and the case for moving this week is compelling.

Swooping in with a bond purchase sends a signal that businesses and consumers ought to brace for the long haul. Distress in the labor market won't be stanched soon, the bank said Tuesday in its monthly policy statement, and unemployment will hit 10% this year. Many expected to see that number in the second quarter, and when joblessness didn't get close, there was a sense of relief that Australia had weathered the Covid-19 storm better than other developed economies.

Now, draconian restrictions in Melbourne and the surrounding state of Victoria, which makes up a quarter of gross domestic product, have neutralized that sentiment. After a modest reopening to local traffic, Australia's six states are scrambling to shut their borders. “Uneven and bumpy” are the words the RBA used to describe the country's revival. That looks like an understatement. The bank will publish a more complete array of scenarios and forecasts Friday.

Don't expect much help from the rest of the world. The RBA made some subtle, but important changes to its language describing the global economy, which “is experiencing a severe contraction.” Such was the optimism a month ago, that the RBA merely noted it “has experienced” the downturn. Since then, the outlook has been updated to “highly uncertain,” as opposed to simply “uncertain.” Such semantics matter. Nothing goes in or comes out of a central-bank statement without great deliberation. The message appears to be: Things may be better than they were during the peak of the crisis in April and May, but they are still bad, and your friendly neighborhood central bank isn't going anywhere. Federal Reserve Chairman Jerome Powell expressed similar sentiments at his press conference last week. (I wrote about that here.)

Several currents run through the RBA's return to the market and dour tone. When the yield target was born in March, it was part of an onslaught by central banks around the world. Those fusillades had a couple of purposes. One was to ensure smooth operation of the financial system as the virus ripped through economies; the other was to demonstrate that unlike the Great Recession, monetary policy would be deployed quickly and with overwhelming force. Evolving communications from the RBA make its actions look more like a traditional policy response rather than a desire to keep the plumbing operating. Extraordinary is the new vanilla. 

Lowe is in this for the long haul. Having slashed rates to near zero and undertaken yield control, he probably wanted to show there's still something he can do. The “out of ammunition” argument doesn't wash with RBA officials. Given the national anxiety about spikes in virus infections and crippling curfews in Melbourne, doing nothing wasn't an option. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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