From an RBA perspective, Governor Philip Lowe expanded on the key policy changes the Board have made in a speech in Sydney, explaining that they are intended to "help support jobs, incomes and businesses as the Australian economy deals with the coronavirus". These measures are;
- An easing in monetary policy: The Board lowered the cash rate by 25 basis points to 0.25% taking it to its effective lower bound, while it also introduced a state-based form of 'forward guidance', which states that it will: "not increase the cash rate from its current level until progress was made towards full employment and that we were confident that inflation will be sustainably within the 2–3 per cent range".
- Yield target on 3-year Commonwealth Government bonds: The RBA will, from tomorrow, set a target of 0.25% for the 3-year Commonwealth Government bond yield. To do this, it will commence quantitative easing where it will purchase Commonwealth Government bonds (and semi-government bonds if necessary) in the secondary market across a range of maturities (technical details here). Unlike the approach taken by the Federal Reserve and European Central Bank in similar initiatives, the RBA has not nominated a specific amount of purchases it will undertake, rather it will make whatever amount of purchases whenever necessary to achieve a yield of 0.25% on a Commonwealth 3-year security. This target will be kept in place by the Bank until such time as "progress is being made towards our goals of full employment and the inflation target".
- Term funding facility to support small and medium-sized enterprises: A new facility has been established where banks will be able to access at least A$90bn (until September 30 this year) in 3-year money at a fixed rate of 0.25% (details here). Banks will be able to borrow amounts that are equivalent to 3% of their existing outstanding credit, though there is an incentive in place whereby that limit will be raised if the lending is directed towards small and medium-sized enterprises.
- Adjustment to interest charged on banks' excess reserves: The technical workings of how the RBA implements monetary policy are such that interest accruing banks' excess reserves held with the RBA overnight is set 25 basis points below the cash rate. Given this most recent reduction in the cash rate, that would have fallen to zero and was thus seen as "unhelpful" in the current climate. To that end, interest earned on Exchange Settlement accounts has been lifted to 10 basis points.
Importantly, given the prevailing liquidity issues in financial markets, the RBA confirmed it will continue with its daily repo operations (one and three month), while it advised it will also conduct six-month operations (or longer) on at least a weekly basis.
In conjunction with these measures, Federal Treasurer Josh Frydenburg announced that A$15bn would be provided for the Australian Office of Financial Markets (AOFM) to invest in wholesale funding markets that are used by small bank and non-bank lenders. The AOFM will have the capacity to purchase residential mortgage backed securities as well as a range of other asset backed securities. This measure will help to ensure borrowing costs for households and small and medium-sized enterprises are not impaired by market dislocations.
