The Reserve Bank of Australia (RBA) met today and agreed to a support package for the Australian economy, through the challenging period that is the COVID-19 outbreak.
The central bank acknowledged this is, first and foremost, a health issue, and that the primary response is to manage the health of the population.
As the RBA said, other arms of policy play an important role in reducing economic and financial disruption. Here are some initial thoughts on what the RBA agreed to today:
1. A reduction in the cash rate target to 0.25 per cent
That’s another 0.25 per cent reduction. This is another historic low, and I suspect it will be the bottom.
2. A target for the yield on three-year Australian government bonds of around 0.25 per cent
This is aimed at lowering the longer-term funding costs in the economy, because many of those funding costs are priced off three-year bond yields.
3. A term funding facility for the banking system, with support for credit to small and medium-sized businesses
This is basically a lending facility for banks, so the banks can borrow from the Reserve Bank at a very low interest rate. They can borrow that money, up to three per cent of their credit initially, and use that to fund lending. If they want to borrow additional amounts, they have to provide commitment they will lend to business, particularly small and medium business.
Other thoughts for now
This is quite a substantial easing in monetary policy. The RBA has reiterated a focus on reducing the pain to business and households from the coronavirus, and that the impact of the government’s shutdown is kept to a minimum. Its measures are designed for securing jobs, income and keeping businesses operating.
Although this is not enough to stop a recession, the Australian authorities are moving in the right direction on this issue, and would have more up their sleeve.
As mentioned, the focus is on recovery, and to stop the impact of the virus from getting too big.
Oliver’s Insights – 2021 – A list of lists regarding the macro investment outlook11 January 2021 | Grow my wealth AMP Chief Economist Shane Oliver looks at the key emerging trends for Australian investors in 2021. Read more
Oliver’s Insights – Review of 2020, outlook for 2021 – from pandemic to recovery09 December 2020 | Grow my wealth AMP Chief Economist Shane Oliver looks back at 2020 and ahead at what’s in store for investors in 2021 Read more
Oliver’s Insights – Modern Monetary Theory – can it help with economic problems or is it just another Magic Money Tree?26 November 2020 | Grow my wealth AMP Chief Economist Shane Oliver looks at what government spending means for investors. Read more
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.