RBA cuts cash rate, starts QE & provides cheap bank funding: Shane Oliver

EXPERT OBSERVER

As part of an ongoing effort to minimize the impact on the economy from coronavirus related shutdowns the RBA announced that it will do the following today:

1. Cut the cash rate by another 0.25% to a new record low of 0.25%. This is likely to be the floor based on past RBA comments that point to little benefit in going to zero or negative. The RBA also committed not to raise the cash rate until progress is made towards full employment and it is confident that inflation will sustainably meet the 2-3% target.

- This is aimed at further lowering short term borrowing costs in the economy and signalling to borrowers and lenders that rates will stay down for a long time.

2. Set a target of 0.25% for 3 year bond yields to be achieved through the RBA buying Government bonds. This is quantitative easing in that it will involve the use of printed money to buy bonds. Unlike in the US and Europe a target has not been set as to the amount of bonds to be purchased.

- This is aimed mainly at lowering longer term borrowing costs in the economy, such as fixed mortgage rates. The increase in the supply of Australian dollars will also put more downwards pressure on the $A.
While the three year rate influences much funding in the economy, it would have made sense to also target the 10 year bond yield which has shot up to 1.5% as it plays a big role in Federal Government borrowing which will rise sharply in the months ahead.

3. Cheap funding for banks for three years at 0.25% with an initial amount of $90bn. Banks can obtain an initial amount of up to 3% of their outstanding loans and then additional amounts if they increase business lending particularly to small and medium sized businesses.

- This is aimed at making sure banks have plenty of funding in the difficult times at present, lowering the cost of funding for banks so they in turn can lower their lending rates and encouraging lending to businesses.

4. Finally bank settlement accounts at the RBA will receive an interest rate of 0.1%, up from zero.

- This is aimed at reducing the cost to banks of holding increased settlement balances at the RBA.

The extraordinary announcements from the RBA today are in response to the turbulence now being seen in financial markets as a result of the shutdown to parts of the global and Australian economies on the back of the coronavirus pandemic. In addition APRA has announced an easing in banks' capital rules. They will combine with further Government measures to be announced in the days ahead to support businesses, households and the economy.

They won't stop the virus, the hit to the economy from the shutdowns and the associated recession. But they should help minimise the fall out in terms of jobs, incomes and businesses such that we can recover more quickly once the virus comes under control.

Its likely though that more action will be needed and until we get clear evidence that the virus is coming under control its too early to say that share markets and the Australian dollar have bottomed.

SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital