RBA Kent speech:
In brief on Kent’s speech, its not really addressing current high inflation.
While Kent did say the board would be less tolerant on inflation, it was in the context of rates when they are already very low (ie not the current circumstance), not as a general statement. The specific passage was:
- “When interest rates are already low, the MPB may have less tolerance for inflation falling below the 2-3% target band” and could respond earlier and more decisively to disinflationary shocks by pre-emptively cutting the cash rate.”
So it’s a dovish signal in a low-rate, disinflationary scenario, essentially saying the board would cut aggressively rather than let inflation undershoot. It’s the opposite framing to what a hawkish tolerance-shift would look like. The intent is to reduce the need to reach for unconventional tools by acting harder and faster with the cash rate first.
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The framework is explicitly preparatory rather than signalling any near-term shift in policy stance, and Kent’s repeated emphasis on the cash rate as the primary and preferred instrument should be read as a deliberate effort to prevent the publication from being interpreted as a pivot signal.
The more market-relevant passage is the acknowledgement that when rates are already low, the MPB may have less tolerance for inflation falling below the 2-3% target band and could respond earlier and more decisively to disinflationary shocks. That framing sets a lower threshold for preemptive easing in a downturn than markets may currently be pricing. The frank assessment that Australia’s bond purchase program was at the lower end of international effectiveness, given the bank-based lending structure and sensitivity to short-term rather than long-term rates, reduces the probability that QE would be deployed aggressively in any future easing cycle. Negative rates are described as operationally unready and deeply unpopular, effectively removing them from near-term consideration.
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RBA Assistant Governor Kent said the cash rate remains the primary policy tool as the bank published a new framework for unconventional instruments to be used only in exceptional circumstances.
Summary:
- The RBA published a new Framework for Additional Monetary Policy Tools at low interest rates alongside a speech by Assistant Governor Christopher Kent, setting out how the Monetary Policy Board would design, deploy and exit unconventional tools if the cash rate were constrained
- The framework identifies four guiding principles: tools must serve monetary policy objectives and financial stability; expected benefits must outweigh costs; tools must be ready and flexible; and the RBA must consult Treasury, APRA and other agencies while preserving operational independence
- Kent said the pandemic Term Funding Facility helped calm markets and lower borrowing costs but introduced interest rate risk that ultimately cost the RBA around $9 billion, citing the value of testing upside economic scenarios more rigorously
- The RBA’s government bond purchase program was assessed as having effects at the lower end of international evidence for Australia, reflecting the bank-based lending structure where borrowing costs are more sensitive to short-term than long-term rates; the program has cost the RBA $30 billion to date
- Yield targets were described as poorly suited to uncertain environments, sharing the challenges of time-based forward guidance while adding material balance sheet risk; their future use would require careful scenario analysis and a credible exit strategy from the outset
- Negative interest rates were described as not operationally ready in Australia and deeply unpopular where deployed, while large-scale foreign exchange purchases were flagged as requiring very large interventions to achieve meaningful macroeconomic effect, with both tools reserved for truly exceptional circumstances
The Reserve Bank of Australia has published a new framework governing how it would deploy unconventional monetary policy tools if the cash rate were pushed to very low levels, with Assistant Governor Christopher Kent using a speech in Sydney to make clear that the cash rate remains the bank’s primary and preferred instrument, and that additional tools carry genuine risks that were underappreciated during the pandemic.
Kent’s address drew directly on Australia’s COVID-era experience to set out what the Monetary Policy Board learned from deploying a package of unconventional measures between 2020 and 2022, and how those lessons have shaped the bank’s approach to any future episode in which conventional policy space is constrained.
The framework’s central hierarchy is unambiguous. The cash rate comes first. Additional tools follow only if necessary, and their deployment would be accompanied by clear communication of purpose, dynamic reassessment over the full lifecycle, and exit strategies considered from the outset rather than as an afterthought.
On the economic policy outlook, the speech contained one passage with direct market implications. Kent noted that when the cash rate is already low, the MPB may have less tolerance for inflation falling below the 2-3% target band and could respond earlier and more decisively to disinflationary shocks by pre-emptively cutting the cash rate. That framing implies a lower threshold for aggressive conventional easing in any future downturn than has historically been the case, and it suggests the bank would seek to reduce reliance on unconventional tools by front-loading rate cuts instead.
The frank assessment of each tool’s effectiveness is notable for its candour. The Term Funding Facility, which provided cheap fixed-rate lending to banks, helped calm markets and lower borrowing costs but introduced interest rate risk that ultimately cost the consolidated public sector balance sheet around $9 billion when rates rose faster than expected. Kent acknowledged that with more weight placed on upside economic scenarios, different decisions might have been reached, including on the facility’s extension in September 2020.
The government bond purchase program was assessed as delivering effects at the lower end of international evidence for Australia, a result the speech attributed to structural features of the domestic financial system: borrowing is predominantly bank-based and linked to shorter-term rates, meaning reductions in long-term bond yields have limited pass-through to actual borrowing costs for households and businesses. The program has cost the RBA $30 billion to date in mark-to-market losses as rates rose.
Yield targets and time-based forward guidance were identified as particularly problematic. The pandemic experience demonstrated how hard it is to communicate conditionality when commitments are anchored to fixed dates rather than economic outcomes, and the yield target compounded that difficulty by adding direct balance sheet risk when the exit became disorderly.
Negative interest rates were explicitly described as not operationally ready in Australia and deeply unpopular in peer economies, while large-scale foreign exchange purchases were assessed as requiring purchases of a scale that would expose the balance sheet to substantial risk for uncertain macroeconomic benefit. Both tools remain formally in the framework but are reserved for circumstances Kent described as truly exceptional.
The bank said fire drills involving the Monetary Policy Board, Governance Board and RBA staff would be conducted to test the framework under time pressure, and that the document would be updated as research, international experience and any future deployment of the tools generated new evidence.
