The Reserve Bank of Australia (RBA) kept rates on hold as expected but this doesn't mean it didn't pull a rabbit out of its hat!
No one expected our central bank to lower the official cash rate as it's as low as it can meaningfully go at 0.25%, but its decision to accept lower quality securities as collateral in the repo market may have caught a number of experts off guard.
Borrowers can seek low cost loans directly from the RBA by using bonds issued by state or federal governments and big banks as security.
Another unprecedented move
The RBA will now accept Australian-dollar securities issued by non-bank corporations with an investment grade credit rating as collateral.
The central bank's decision to accept higher risk assets is designed to ensure that the cost of debt remains low as the extra liquidity being pumped out by the RBA will reach further into our financial market.
This is another unprecedented move by our conservative central bankers. It mimics, to a limited extent, the decision by the US Federal Reserve. The Fed said last month that it would buy corporate bonds that are below investment grade.
The RBA isn't going that far, but it too is certainly moving up the risk curve by buying securities from non-bank corporations.
The more important question though is the motivation behind the move. Is this because the central bank is seeing early signs of problems or is it pre-emptive?
Competing forces
The Australian dollar and the S&P/ASX 200 Index (Index:^AXJO) were relatively unmoved by the news.
The dollar would normally come under more pressure while risk assets would rise on such a development, but there were a few offsetting factors in today's rate announcement.
The RBA said its QE exercise is working so well that it will lower the size and frequency of its bond purchases, which currently stands at $50 billion.
What the RBA's decision mean for the ASX
The custodians of Australian monetary policy also effectively stated that interest rates will be going nowhere for a few years.
The job market will need to be heading back to full employment and inflation will need to return to its target band of 2% to 2.5% before the RBA will even think about lifting rates.
Given that the bankers base case scenario calls for a 7% unemployment rate by end of next year and an inflation rate of no more than 1.5% for 2021, the status quo is likely to remain for quite a while yet.
Having said that, the RBA's announcement is a net positive for the ASX and further reinforces my positive take on the outlook for the share market.
