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Summary
- Reserve Bank lowered the cash rate to 0.1% and is now lending ADIs at 0.1% under the Term Funding Facility.
- Now the bank has officially started quantitative easing program and is seeking to buy $100 billion of Government bonds over the next months.
- As per its new forecast, the unemployment rate is expected to be under 8%, and the economy is expected to grow at 6% over the year to June 2021
Reserve Bank of Australia (RBA) yesterday announced a set of measures to aid the economic recovery in the monetary policy meeting. The bank has now officially begun quantitative easing (QE) program with a $100 billion bond-buying spree.
Image Source: © Kalkine Group 2020
The cash rate is now at a record low level of 0.1%. The yield target on a 3-year Australian Government bond is now 0.1%. Market participants have lauded the efforts of the bank, while some also say that the central bank has withered its ammunition at one go.
On 04 November 2020, the market has shrugged off the news and the benchmark index is down by over 1% and trading at 5,987.
Interest rate cut, 3-year yield target
Consistent with its mandate to create jobs and maintain stable prices, the bank lowered the cash rate to 0.1%, effectively reducing the cost of borrowing again.
Interest rate cuts would be passed on to consumers by the banks now. It is expected to lower the interest payment bills of the households. Likewise, interest rates on deposits would now be squeezed further.
3-year Australian Government bond yield target is now at 0.1%. As a result, the cost of borrowing for Australian businesses is set to fall further. The bond bought under this program would be in addition to the $100 billion QE program.
Quantitative easing and Term Funding Facility
The central bank will begin buying Government securities across the yield curve. The program will run in secondary markets for three days a week. Mondays and Thursdays would see buying of Australian Government bonds, and State Government bonds would be bought on Wednesdays.
The bank is expecting to buy bonds with maturities of five to ten years, but it can buy bonds outside this range. Inflation index bonds are not part of the program, and the bank would only buy fixed-rate bonds.
It is expected that the program will translate to lower borrowing costs for Australia, a lower exchange rate, and higher asset prices. The exchange rate has been one of the concerns as the Australian Dollar has strengthened over the past six months.
Term Funding Facility would now lend authorised deposit-taking institutions (ADIs) at 0.1%. It was noted that $83 billion had been accessed by ADIs, and they have additional access of $104 billion under the facility.
Unemployment rate forecast is a tad below 8%
On Friday, the bank would release an updated economic forecast. It was acknowledged that the incoming economic data has been better than expected, specifically employment and household spending.
Now the bank is expecting GDP to increase by 6% over the year to June 2021 compared to the previous forecast of 4%. The unemployment rate is expected to be less than 8% against 10% in the previous forecast.
It was also reaffirmed that the bank has not run out of firepower and has additional policy tools. The Board continue to believe that negative interest rate policy would not suit Australian condition and is highly unlikely.
