What can the central bank do following the end of rate cuts?
For the first time in the RBA’s history, a cut to the official rate was not considered to be an option to stimulate the Australian economy, with the central bank shifting to unconventional monetary policy.
Often considered the last resort for monetary policy, the RBA revealed that it has purchased over $36 billion in bonds in a process known as quantitative easing (QE) since its mid-cycle emergency meeting in March.
As expected by analysts, the cash rate was held at 0.25 of a percentage point, with RBA governor Philip Lowe previously stressing that the central bank had “no appetite” for negative interest rates, following mixed results overseas.
However, the RBA did discuss targets relating to unconventional measures announced following last month’s out-of-cycle rate cut.
The measures included the commencement of QE through the purchase of government bonds in the secondary market and the launch of a $90 billion term funding facility (TFF).
Mr Lowe said the RBA remains willing to provide further support through government bond purchases but would reconsider the frequency of such moves if conditions improve.
“The bank will continue to promote the smooth functioning of these important markets,” he said.
“If conditions continue to improve, though, it is likely that smaller and less frequent purchases of government bonds will be required.”
Mr Lowe noted that the RBA would “do what is necessary” to achieve its three-year bond yield target of 0.25 of a percentage point (cash rate), adding that the target would not be lifted “until progress is being made towards the goals for full employment and inflation”.
The RBA also noted the progress of its $90 billion TFF, revealing that the first drawing from the facility was made on Monday (6 April).
The central bank reiterated that the TFF would help lower funding costs across the banking system and “provides an incentive for lenders to support credit to businesses, especially small and medium-sized businesses”.
Mr Lowe also noted that the central bank would continue to provide liquidity support to the banking system through repurchase (repo) transactions on the overnight money market.
“The bank has injected substantial liquidity into the financial system through its daily open market operations to support credit and maintain low funding costs in the economy,” Mr Lowe said.
“It will continue to ensure that the financial system has sufficient liquidity.”
However, Mr Lowe said that given the “substantial liquidity” already in the system and the commencement of the TFF, the repo transactions are “likely to be on a smaller scale in the near term”.
“Operations at longer terms will continue, but the frequency of these operations will be adjusted as necessary according to market conditions,” he said.
Mr Lowe concluded by stating he is confident that the co-ordinated monetary and fiscal response to the economic impact of the coronavirus, along with complementary measures taken by Australia’s banks, would “soften the expected contraction and help ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed”.
“The Australian financial system is resilient. It is well capitalised and in a strong liquidity position, with these financial buffers available to be drawn down if required to support the economy,” he concluded.