‘Really nothing is off the table,’ Australia’s central bank chief says
The government says its will buy A$15bn of residential mortgage-backed securities and other asset-backed securities over the next 12 months
Sydney — Australia made a historic foray into quantitative easing on Thursday and said it would do “whatever is necessary” to ensure funding costs are low and credit is freely available, as the coronavirus pandemic jolts businesses.
Following an out-of-schedule meeting, the Reserve Bank of Australia (RBA) reduced its cash rate to a record low of 0.25% and said the board would not tighten policy until it achieved its employment and inflation goals.
It also set a target for the yield on three-year Australian government bonds at about 0.25%, which it plans to achieve by purchases in the secondary market beginning on Friday.
“Really nothing is off the table,” RBA Governor Philip Lowe said in Sydney after giving a speech on the newly announced measures.
“We are in extraordinary times and we're prepared to do whatever is necessary to make sure funding costs in Australia are low and the supply of credit is there for Australian businesses and households.”
The announcement helped push three-year yields to 0.35% from 0.589% before the RBA's decision, though they were still higher than the new target.
The moves also helped lift the Australian dollar after it briefly collapsed to $0.5510, the lowest since late 2002. It was last down 0.16% at $0.5758.
The RBA's stimulus follows an unprecedented step up in global co-ordination by central banks, governments and regulators since the start of this week to cushion the effects of the coronavirus.
The US Federal Reserve on Sunday slashed key rates by 100 basis points, boosted asset purchases and flushed the system with liquidity. A number of other major central banks have followed suit.
Australia's A$2-trillion ($1.11 trillion) economy has had a near 30-year dream run without recession, thanks in part to rapid growth in Chinese demand for commodities and a housing market boom.
It was also able to emerge from the 2008-2009 global financial crisis relatively unscathed, allowing its central bank to spurn unorthodox monetary policies adopted by many of its developed world peers during that period.
But the coronavirus now hangs heavy over the outlook with economists at major banks predicting the country would slide into recession in the first half of 2020.
Australia has recorded about 600 coronavirus infections and six deaths and officials are growing anxious about the prospect of an exponential rise in cases.
In a sign of the problems, Australian flag carrier Qantas Airways told most of its 30,000 employees to take leave on Thursday and ceased international services.
Lowe said the cash rate was likely to stay at 0.25% for three years, adding that Australia needed to steel itself for a rise in unemployment in coming months.
“We are not going to see much job hiring and the reality is we will see quite a few job losses,” he said.
The RBA's stimulus includes a three-year funding facility for at least A$90bn to the country's banks at a fixed rate of 0.25%. Lenders will be able to obtain initial funding of up to 3% of their existing outstanding credit.
The facility will be enhanced if banks boosted lending to businesses, especially to small- and medium-sized enterprises, the RBA added.
Australia's prudential regulator also loosened its capital requirements to enable banks to lend more freely.
In a separate statement, the government said it would buy A$15bn of residential mortgage-backed securities and other asset backed securities over the next 12 months.
This is on top of the A$17bn of fiscal stimulus already announced.
Together with the RBA's lending package, that would pump more than A$100bn into the economy.
Lowe also called for more government stimulus, which was echoed by economists.
“The best response to Covid-19 remains a fiscal one, supported by liquidity measures,” said Callam Pickering, APAC economist at global job site Indeed.
He noted scope to expand the support offered to banks and even buy longer-term government bonds.
Earlier, the RBA used its daily market operation to pump a record A$12.7bn into the banking system, aiming to ease liquidity constraints in a stressed bond market.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.