RBA cuts cash rate to all-time low

19 March 2020, Written by Matt Ogg

RBA cuts cash rate to all-time low

The country's monetary policy will now have very little wiggle room after the Reserve Bank of Australia (RBA) made cut interest rates further in a bid to keep the economy afloat.

The cash rate target has been reduced to 0.25 per cent until progress starts to be seen towards full employment.

This latest move will be accompanied by additional funding support aimed at SMES, which will be worth at least $90 billion. 

In a statement released today, Reserve Bank of Australia (RBA) Governor Philip Lowe said major disruptions caused by the spread of Covid-19 have led to very high market volatility, large declines in equity prices and historic lows for government bond yields.

"The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus," Lowe said.

"At some point, the virus will be contained and the Australian economy will recover.

"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."

The cash rate reduction was decided upon yesterday during an RBA board meeting, with experts confident that inflation can be kept within the 2-3 per cent range.

The RBA is also aiming for a 0.25 per cent yield on Australian Government bonds, and has established a three-year funding facility for banks to provide credit support in particular to SMEs.

"ADIs [authorised deposit-taking institutions] will be able to obtain initial funding of up to 3 per cent of their existing outstanding credit," Lowe said.

"They will have access to additional funding if they increase lending to business, especially to small and medium-sized businesses. This facility is for at least $90 billion.

"The Australian Government has also developed a complementary program of support for the non-bank financial sector, small lenders and the securitisation market, which will be implemented by the AOFM [Australian Office of Financial Management]."

Exchange settlement balances at the Reserve Bank will also be remunerated at 10 basis points, rather than zero as would have been the case under the previous arrangements.

"This will mitigate the cost to the banking system associated with the large increase in banks' settlement balances at the Reserve Bank that will occur following these policy actions," Lowe said.

"The Reserve Bank will also continue to provide liquidity to Australian financial markets by conducting one-month and three-month repo operations in its daily market operations until further notice.

"The various elements of this package reinforce one another and will help to lower funding costs across the economy and support the provision of credit, especially to small and medium-sized businesses."

Lowe said Australia's financial system was resilient and well placed to deal with the effects of the coronavirus, with the banking system well capitalised and in a strong liquidity position.

"Substantial financial buffers are available to be drawn down if required to support the economy," he said.

"The Reserve Bank is working closely with the other financial regulators and the Australian Government to help ensure that Australia's financial markets continue to operate effectively and that credit is available to households and businesses."

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Author: Matt Ogg

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