The Reserve Bank of Australia (RBA) has pulled the emergency lever, cutting the cash rate to a new record low of 0.25% and commencing quantitative easing. Following its emergency meeting this afternoon, the RBA announced its plans to implement monetary policy to reduce the economic and financial disruption resulting from coronavirus.
The RBA has agreed on a comprehensive package to support the Australian economy, including:
- A reduction in the cash rate to 0.25%, with the Board vowing not to increase the cash rate until progress is being made towards full employment.
- A target of 0.25% yields on 3-year government bonds, to be achieved through purchases of government bonds in secondary markets.
- A term funding facility for the banking system, with authorised deposit-taking institution (ADIs) able to access additional funding if they increase lending to business.
- An interest rate of 10 basis points on exchange settlement balances at the Reserve Bank, rather than zero as would otherwise be the case.
The RBA said coronavirus is first and foremost a public health issue, but is having a “very major” impact on the economy and the financial system. The S&P/ASX 200 Index (ASX: XJO) has plummeted over 30% from above 7,000 in February and is currently sitting at under 5,000. Financial market volatility has been very high.
While equity prices have experienced large declines, government bond yields have declined to historic lows. The functioning of major government bond markets has been impaired. This has caused disruption in other markets given the role of government bonds in setting financial benchmarks.
The RBA’s foreign counterparts have made similar moves recently. The US Federal Reserve slashed its funds rate by a whopping 1% on Sunday, targeting a range of 0–0.25%. It has also committed to purchasing $700 billion in US treasuries and $200 billion in mortgage backed securities over the coming months.
The RBA has been pumping liquidity into the market, purchasing a larger than usual number of repurchase agreements on the overnight money market. Between 17 and 18 March, the RBA purchased over $19 billion in assets to ease the squeeze on Australian lenders.
All these efforts are designed to stave off a coronavirus-invoked recession, which economists are warning may still take place. Monetary policy stimulus will no doubt help, but whether it will be enough to offset demand losses from business closures and social distancing is open to question.
The RBA emphasised that the virus will be contained and the Australian economy will recover. In the meantime, its priority is to “support jobs, incomes, and businesses, so that when the health crisis recedes the country is well placed to recover strongly.”
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.