Innovative measures needed from RBA to manage ‘perfect storm’

26 March 2020

The Reserve Bank of Australia (RBA) will need to be ‘innovative’ in how it manages this financial crisis and supports liquidity, writes Janus Henderson’s head of Australian fixed interest Jay Sivapalan. 

So far, the RBA has cut rates to 0.25%, its lowest possible rate, and announced various stimulus measures it intends to use including a 0.25% target for the yield on the 3-year Australian Government bond and a term funding facility for the banking system. 

Sivapalan, who manages the Janus Henderson Australian Fixed Interest fund gave the example of the Bank of Japan, a country that had negative rates since January 2016, which was able to buy equities. Another suggestion would be a new category of repo-eligible securities which investors could sell to the RBA and purchase back at a later date to access near-term funding. 

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He said he expected to see further announcements from the RBA in later weeks on how it would manage liquidity.  

“The point here is that central banks, including the RBA will need to be innovative and stand ready to act in order to support liquidity. We feel this is the most important tool for the weeks and months ahead, where cash rate settings are a secondary consideration.”  

He said the bank’s ability to broker for the investment community had ‘dramatically diminished’ as a result of regulations imposed following the global financial crisis which meant today’s environment was turning into a ‘perfect storm’ for central bankers.  

“These developments, coupled with an exogenous shock, are almost the perfect storm that central banks and regulators feared. It is fair to say that a major contributing factor of the veracity of the market sell-off, in particular risk assets such as corporate debt, has been lacklustre liquidity and poor price discovery.” 

“One of the biggest risks that market participants are facing at present is a liquidity freeze, largely because the banks are not there to provide pricing and liquidity. That's not to say there isn't a weight of money waiting to invest and wanting to buy. We're one in that category; but many like us are choosing not to spend cash reserves all at once.” 



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