As expected, the prospect of weak inflation, high unemployment, and tepid economic growth for the next few years has forced the Reserve Bank into a set of historic moves at Tuesday’s Melbourne Cup day monetary policy meeting.
With Australia facing a period of high unemployment (well into 2023), Reserve Bank Governor Dr. Phil Lowe said the bank is “committed to doing what it can to support the creation of jobs.”
While the bank said it had been encouraged that “recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago” more policy help was needed.
“The recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus,” Dr. Lowe said in his post-meeting statement.
To this end the board agreed on a widely forecast set of measures:
1. a reduction in the cash rate target to 0.1 percent
2. a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 percent
3. a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 percent. (That has been drawn down to $87 billion of the $200 billion available until June 30, 202).
4. a reduction in the interest rate on Exchange Settlement balances to zero
5. the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.
So far the bank has spent $60 billion buying bonds to drive and keep the three year rate at 0.25%. That will continue to keep the rate at 0.10%.
“Under the program to purchase longer-dated bonds, the Bank will buy bonds issued by the Australian Government and by the states and territories, with an expected 80/20 split. These bonds will be bought in the secondary market through regular auctions, with the first auction to be held this Thursday for Australian Government securities.
The Bank remains prepared to purchase bonds in whatever quantity is required to achieve the 3-year yield target (0.10%).
Any bonds purchased to support this target would be in addition to the $100 billion bond purchase program,” Governor Lowe said in his historic statement on Tuesday.
