The Reserve Bank will leave its cash rate at the new record low of 0.25% until the economy rights itself and emerges from the COVID-19 crisis.
The bank’s expected emergency 0.25% reduction in the official cash rate on Thursday was the first change to rates outside an ordinary monthly meeting this century.
Governor Philip Lowe has previously signaled 0.25% would be the low point for official interest rates.
In his statement, the governor said the 0.25% level would be maintained “until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 percent target band”.
The cut was expected as was a near support package from the central bank aimed at helping banks and other financiers (more than 130 so-called authorised deposit-taking institutions, or ADIs) to keep lending to businesses of all sizes, from the smallest to the largest.
The news saw a small uptick in the value of the Aussie dollar to around 55.57 US cents, the 10-year bond yield leaped 40 points to 1.58% (which is closer to what it should be long term).
The ASX sold off on a day it opened higher and then started drifting lower as the bad news of profit downgrades and closures continued to mount. It was down 170 points at 3 pm.
That will be a $90 billion package. In addition, the federal government will provide a further $15 billion to be provided to small banks and non-bank lenders to support small and medium businesses that do not have access to bank finance.
These other agencies presumably include non-traditional sources of finance such as factoring companies (who buy company receivables at a discount).
He also announced the RBA would target the interest rate on Australian government three-year bonds at 0.25%. It would do this by buying bonds in the secondary market starting on Friday.
This would maintain the yield curve at a flat level for three years.
“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,” he said.
Dr. Lowe said the package would aid the economy.
“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,” he said.
Dr. Lowe said the economy was in a good position to deal with the fallout from the coronavirus.
“The banking system is well capitalised and is in a strong liquidity position,” he said. “Substantial financial buffers are available to be drawn down if required to support the economy.
“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.”
In a separate statement, banking and financial regulator, APRA said it would relax the current higher capital requirements that banks are working to (10.5% in high-quality capital) build-up by next year and said it had told the banks had been told they can start using some of the $235 billion in this high-quality capital, to maintain lending to the economy.
“APRA is advising all banks today that, given the prevailing circumstances, it envisages they may need to utilise some of their current large buffers to facilitate ongoing lending to the economy. This is especially the case for banks wishing to take advantage of new facilities announced today by the Reserve Bank of Australia to promote the continued flow of credit.
“Provided banks are able to demonstrate they can continue to meet their various minimum capital requirements, APRA would not be concerned if they were not meeting the additional benchmarks announced in 2016 during the period of disruption caused by COVID-19.
APRA Chair Wayne Byres said in the statement “APRA has been pursuing a program to build up the financial strength of the system for many years, when banks had the capacity to do so. As a result, the Australian banking system is well-capitalised by both historical and international standards.”
