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‘Building a bridge to recovery’

Lachlan Maddock
— 1 minute read

The RBA has taken the historical step of launching Australia’s first quantitative easing program as the country goes through “extraordinary and challenging times”.

In an emergency meeting called weeks ahead of its usual date, the RBA cut rates to 0.25 per cent and set a target for the yield on three-year Australian government’s bonds of around 0.25 per cent, to be achieved through the purchase of government bonds in the secondary market. Those purchases will commence on 20 May. 

“At some point, the virus will be contained and the Australian economy will recover,” RBA governor Philip Lowe said in a statement. 

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“In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly.”

Governor Lowe indicated that, while the RBA had previously seen progress on its goals, interest rates will now likely stay at their level for an extended period of time and that the bank is “likely to remain short of those objectives for somewhat longer”. 

“I am not able to provide you with an updated set of economic forecasts,” governor Lowe said in a speech.

“The situation is just too fluid. But we are expecting a major hit to economic activity and incomes in Australia that will last for a number of months. We are also expecting significant job losses. The scale of these losses will depend on the ability of businesses to keep workers on during this difficult period.”

The move marks the first time that quantitative easing – one of the mainstay policies of the US Federal Reserve during the GFC – has been deployed in Australia. The move was forecast by many economists through last year as the RBA cut rates closer and closer to the bottom – and while it’s been welcomed by some, there are others who see it as a grim sign of things to come.

“The RBA has fired its very last cash rate bullet and must now resort to quantitative easing,” said BetaShares chief economist David Bassanese. 

“We are living in unprecedented times, given we are effectively destroying our own economy to take pressure off the health system assuming COVID-19 cases spike. The cost in lost jobs, wealth and other forms of related ill-health will now also be immense. The RBA can only do so much in the face of virtual self-inflicted depression conditions developing around the world.”

The RBA will also provide a term funding facility for the banking systems, with an eye to providing particular support for credit to small and medium-sized businesses, while exchange settlement balances at the Reserve Bank will also now be remunerated at 10 basis points, rather than zero. 

“The Reserve Bank Board did not take these decisions lightly,” governor Lowe said. 

“But in the context of extraordinary times and consistent with our broad mandate to promote the economic welfare of the people of Australia, we are seeking to play our full role in building that bridge to the time when the recovery takes place.”

 

‘Building a bridge to recovery’
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